Sell CELG (cover short puts)

Sell CELG via buying back short puts to close
Buy CELG Aug 47 puts (to close)

CELG was down a tad early in the day, and I placed the order then. Got filled just before the close, with the updraft for a teeny tiny profit. I reduce my possible long exposure if by some chance the stock market breaks down completely next week. I don't see that happening, but that doesn't mean it can't happen.

Long INTC, IWM, XLE, MTB, AMGN

Prechter: March lows will be broken

Robert Prechter of Elliot Wave International is making the rounds with a prediction that the bear will be back and the stock market will take out the March 2009 lows (Yahoo link).

For those who are not familiar with the name, Prechter became famous for some similarly bold stock market calls in the 1980s. Back then he was named timer of the year twice. I am seeing mixed information about Prechter's current record. Wikipedia is saying it is poor, but I remember reading a more reliable link (anyone can edit Wikipedia entries) saying the recent record was quite good, but can't find that now.

Anyway, it is a big name, a person with experience giving his opinion.

Fed just announced, no change in policy, as expected. For now, I am mostly looking to sit tight, hold on to my open positions until expiration on the 21st.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Don't worry, be happy

The lead article on Marketwatch is "Rally Too Much Too Soon?" (link). With that kind of lead after a 113 point Dow up day, I think of that old song "Don't Worry Be Happy" (YouTube link).

Those that are most unhappy are the bad news bears, or those that keep calling "top." Like I have always written, calling top (or bottom) can be a fun game, but it is rarely profitable. Unlikely as it may seem, I still believe that there is a large group that missed the entire rally off the lows, and didn't get back in on the recent modest pullback.

Of course there is a top out there, however, just going on headlines, it isn't here yet, the market rarely complies like that. It is like a Catch-22, we can't get a top, if people keep calling top. If pundits stop calling top, we might get a top.

With all that, in earlier blog entries, I mentioned SPY 105 (currently 101.2) and late August as a possible price and time. Expiration Friday is August 21, the stock almanac says that the last week in August can be a doozy on the downside, and that September and October can be volatile as well. So as the time gets closer, I will be on my toes, even though for now, I believe we have about two more weeks for the Bobby Mcferrin song.

Kahn: correction is near

Michael Kahn writing for Barrons, points out two sentiment indicators that may mean the much anticipated correction is near (link).

>>
Last week, the American Association of Individual Investors survey reported that 48% of their members polled were bullish while only 31% were bearish. Historically, the average bullish and bearish readings are 39% and 30%, respectively, so this does present a somewhat unusual optimism on stocks.
>>

Add to that a major stock analyst calling for another 10% up, and that is another piece of the puzzle in place. With all that, the rally isn't going to go without a fight. There is enough steam built up to mitigate any immediate sharp downturn. Resistance often becomes support, so I expect SPY 95 to offer support on the way down.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Romantic notion of selling at the top

Bears get rolled again, as the stock market keeps rolling onward and upward. Many traders, more so novices, but many veterans as well, have this romantic notion that he/she can call the exact top and get out at that perfect time.

Readers know that calling the top, or the bottom is something only a few successfully do, at least those that trade real money. Armchair pundits and paper traders often seem to nail the exact top or bottom. In hindsight, the game is easy, in real time, only a few even try to do it. Most are content with 80% of the move, or to scalp for a few dollars where they can.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Luby: Line in the Sand

Bill Luby at Vix and More (link) writes about the "line in the sand" for the bears at 1000 for the SP500 futures. (SPY is the ETF that is close to the SPX futures and is the one I typically trade.)

>> Bill Luby wrote:
Sooner or later, the bulls will run out of steam, the bears will get tired of retreating and we will have some semblance of a top. With SPX 1000 just around the corner, tomorrow the last trading day of the month and a number of overbought signals being pushed to extremes, today or tomorrow looks like a good place for any bears left alive to make their stand.
>>

It reminds me of a story, I believe it is from the first "Market Wizards" book. Anyway, the story is about a commodities trader who is has been heavily long a certain commodity for several weeks. Another trader asks "where is it going?" To make it relevant to the current setup, the answer would be "SPX is going to 1000." Where is it now? SPX 992.

Upon thinking a moment about that setup, the trader liquidated most of the long position. Sometimes it is that clear, if a person stops to think that the target price is less than 1% away. For position traders that are straight up long, there is little need to squeeze out the last percentage point. For hedgers, option traders, the math and analysis can get much more complex.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Buy AMGN (sell puts)

Buy AMGN via selling Aug 50 puts, stock at 62.65. Amgen was up on earnings yesterday. Support at 57 gap. In an odd twist, put premiums increase this morning, despite a slight bump up in the stock. Might be due to some option broker recommending some of those options, or spreads using those strikes.

Stock market had a relatively sleepy Monday and Tuesday. Bias is still to the upside. There is so much upward momentum, it will take more time, or more news to roll it over. For the intermediate term investor, I am thinking late August may be a time to lighten up. Again, these are just idle thoughts, not intended to be advice.

Long INTC, IWM, XLE, MTB, CELG, AMGN

What if you've made your nut?

In a comment to a Roger Nusbaum blog entry, someone poses that question (link).

>>Anonymous said in a comment...
In many ways, what you're exploring here Roger also applies to retirees who have already made their nut, regardless of whether they enjoyed a triple along the way or not. Risk adjusted return is critical for us, which generally translates into a safe income stream with some growth to cover inflation.
>>

The stock market went up 4% this past week, 11% for two weeks. If it kept going up 11% every two weeks, it would about quadruple in 28 weeks (14 weeks would be a double, another 14 weeks, another double). Let's say that scenario is unlikely. However, it does demonstrate how powerful rallies can be and gets to the point of Roger's column and musings.

This is a trading blog, and I report my short term trades. I talk about my long term investments tangentially. Every person's situation, risk tolerance, is going to be different.

Upside target SPY 105

The market had several good reasons to go down today, disappointing results from AMZN, MSFT, lower consumer confidence readings. Instead, buyers came in, and the broad market closed modestly higher. If the stock market was ready to go down, -200 on the Dow would not have been surprising given the news.

There is a gap on the SPY chart around 105 back in October 2008 (one year chart). This looks to be a decent exit point for those investors wary of the rally and wanting to lighten up.

Long CELG, INTC, IWM*, MTB, XLE*
* IWM and XLE positions are near delta zero, meaning that moves in the underlying currently have near zero effect on the price of the options because they have moved so far away from the strike prices.

Buy CELG (sell puts)

Buy CELG via selling Aug 47 puts
Celgene higher on earnings and full year projection. Support at 47.5, stock at 54.75.

Stock market rally booms ahead. For Elliot wave folks it looks like a fifth wave up from the March lows. After that is anyone's guess, but the old clichés about don't fight the Fed, don't fight the tape comes to mind. Fed continues to accommodate, tape is strong. A third cliché might be: don't fight earnings.

If earnings are up (above consensus estimates and whisper numbers), stocks tend to go up. So far, there have been a lot of high profile upside earnings surprises, and comparatively few misses.

Long INTC, IWM, XLE, MTB, CELG

The rally keeps rolling

The Nasdaq has its 10th up day in a row, the longest such streak in 12 years. SPY rolls up its sixth winner, and reaches another new high for 2009 (marketwatch article).

Earnings have been the story, or non-story. There have been some noteworthy winners such as INTC, IBM, CAT. The misses have been mostly mild. I am of the school of earnings, that long term, earnings are the primary driver for stock prices. This quarter, for the most part, earnings have been good. There have been isolated misses such as LMT (down 7 today on earnings), and a mild decline for GOOG.

My new position in M & T Bank gets off to a poor start. I attribute the decline to lackluster results at STT. In the worst case, an exercise if MTB falls below 45, it isn't a bad stock to own.

Yes, readers may notice that this is different talk than last year when I cut my losses ruthlessly. The new talk is about doubling down (INTC), and taking delivery in stock if the strike gets hit (MTB). Why is that? First, the market is acting a lot better than it was a year ago. SPY remains well above the 200 dma, so that means the long term trend for now is up. Support levels seem to actually provide support. Last year, support levels, were often the best place to initiate short positions as others stepped in to buy.

A second reason is that overall, I remain underinvested in stocks, despite the four tiny long positions (below). Adding on weakness would be a way to get more money working.

With all that, August and September can be treacherous months for the stock market. This year, I think it will be September/October that brings back some of the rollercoaster down drafts. I think August might see a lot more of these slow moving summer vacation trading days.

As readers know, I am not big on predictions. While they can be fun, I see predictions mostly as entertainment. The money is made by making and executing trading plans, right sizing of positions, managing risk. I post my actual trades a few minutes after I get the fills. That info is more substantial than any predictions that I may make.

Long INTC, IWM, XLE, MTB

Buy MTB (sell puts)

Buy MTB via selling Aug 45 puts
Buffalo headquartered M & T Bank moves higher on earnings, support at 45 (chart). Puts are now 11 points out with the stock at 56.30.

Long INTC, IWM, XLE, MTB

1-0 for July expiration cycle

The record is 1 winner, zero losers for the July cycle. I also have some open trades (IWM, XLE, INTC for August). I remain up a tiny bit for the year (less than 1% based on the capital available in the account).

The week is wild up 7% week for SPY. Who knew? Certainly not me. It makes me wish I was wildly bullish. I could not get bullish fast enough, and stuck to my knitting of low risk, low reward types of positions. All I have in my take-home fishing bucket is the one little guppy trade, TM Toyota for the month of July.

Long IWM, XLE, INTC for August

Buy INTC (sell puts)

Buy INTC via selling Aug 16 puts, stock at 18.01

INTC higher on earnings and guidance. Plan is to double down if the stock fills the gap (chart) at 17, depending on how it gets there.

Stock market is punishing the bears today. There are lots of them are prowling. So far SPY has held the 200 day-moving-average (chart2), I confess I thought a whipsaw lower was much more likely.

Meanwhile, the "chickens" are running from Treasury bonds, with a second big down day in a row. Bonds yields are getting closer to the targets some pundits have been predicting.

Long TM for July
Long IWM, XLE, INTC for August

Pins, round numbers and magnets

With option expiration this Friday, Bill Luby at Vix and More has an article about how round numbers act as magnets and how to trade that tendency (link). A pin is when a stock closes at an option strike price on expiration Friday. Example: IBM closes right at 100 causing all the calls and puts at that strike to expire worthless.

>>
Rather than look as round numbers as potential areas of enhanced support or resistance, I like to think of them has having a strong attractive power, almost as if they are large magnets. In some indices and stocks, prices tend to linger near round numbers for longer periods than a random distribution would suggest.

One way to take advantage of the attractive tendencies of round numbers is to sell options at or near that strike. Straddles, strangles, butterflies and iron condors would certainly be appropriate choices, but I have personal preference for strangles, with their wide maximum profit zone and simple construction/position management.
>>

Quiet market today, the dog days of summer are upon us, with many traders taking vacation. Volatility, and option premiums are down.

Long TM, IWM, XLE

Buy XLE (sell puts)

Buy XLE via selling Aug 35 puts

XLE down to support around 45, puts are way out. It is a way to get a tiny bit more bullish exposure, without chasing the overall market rally. ThinkorSwim analyzer software says 2.2% chance of moving below 35 before August expiration.

I had a strong intuitive feeling to sell SPY puts or BA puts this morning, but I ignored it, and then the market popped up. Most of the time those intuitive feeling trades get me in trouble.

Long TM expiring this week
Long IWM, XLE for August

Tbond game of chicken

The majority of bond market pundits predict higher yields by the end of the year, and yet yields on bonds fell for the fifth week in a row. It is like a game of chicken where most believe prices will end up lower, but week after week bond prices continue to climb as yields continue to slide. Meanwhile, stocks experienced their fourth losing week in a row. Oil and gold are also at minor lows.

This Reuters article touches on some of the points (link).
>>
[ten year treasury yielded touched] 3.261, the lowest since May 21 ...

A Bloomberg survey of banks and securities companies projects the yield will be 3.61 percent by year-end ...
>>

Mark Hulbert makes a strong argument that longer term, yields will be higher and bond prices lower, in this Barrons article (link2).

The open question is why are bond prices moving higher, when longer term most think they are going lower? The obvious answer is that most believe that short term, bonds will move higher, and that they will be smart and nimble enough to sell their bonds before the fundamentals take hold.

Long TM, IWM

Buy IWM (sell puts)

Buy IWM via selling Aug 39 puts, stock at 48.21, support at 47.50. IWM is a smaller dollar amount than SPY. Calendar tends to be weak. At a strike nine points and 20%+ lower from here, it would be a buy-on-weakness in the worst case scenario of IWM declining 20% by August expiration.

Long IWM, TM

Adam Warner on UNG

I mentioned UNG in a past post, and some other blogs are recommending it for purchase. UNG is a relatively new product and there are issues. Adam Warner at Daily Options writes about some of them (article).

For now, I would steer clear. No need to get too cute on something I don't quite understand.

Long TM

Head and shoulders on SPY?

SPY forming a small head-and-shoulders formation (3 month chart). If the neckline is broken, the downside target is SPY 80.

BA broke round number chart support at 40. At this point, 37.5 looks likely. I've also been looking at some railroad stocks, BNI, CSX, and they have been acting poorly. XME, XLE, UNG are also of interest. Earnings will tend to dominate the news during the next few weeks.

Long TM

The Sirens call

Today's market action was a strong lure for those that are mostly out. To me, it is like the mythological siren's call (Wiki reference link). The stock market just had its best up quarter since 1998, VIX showing signs of complacency, MACD and other long term timing tech indicators giving buy signals.

Despite the down day, SPY isn't down to the first support at 87.5.

Long TM

Buy TM (sell puts)

Buy TM Toyota via selling Jun 65 puts

Long TM

/edit: oops should be Jul 65 puts

VIX says sell, 50/200 cross says buy

Old school technical analysts use the 50 day moving average/200 day moving average crossover as a timing tool. The 50 day represents the short term trend, the 200 day the long term. When the 50 day crosses over the 200 day that is a buy signal. Here is a two-year chart on SPY (link).

Over at the VIX and More blog, Bill Luby writes about a VIX sell signal (link2). VIX is a sentiment indicator. Luby does a lot of work refining and backtesting on what actually generates good trading signals, because the raw VIX numbers typically do not.

No positions

Surprise, surprise, surprise

Today is at least the third recent up day that surprises me. BBBY, NKE are some of the movers on earnings. I decide to take another dose of patience and wait for a better day.

No trading positions

Stuck in mud, BA 787, SDS

I missed today's rally, could not pull the trigger fast enough on selling SPY puts, and then SPY climbed too high for me to want to chase it.

Boeing BA lower after a downgrade and yesterday's news about another delay in the new 787 Dreamliner plane's test flight. BA gets very interesting to me at 40, with the idea to sell the Aug 30 puts (30 is the recent low).

Random Roger has an interesting blog entry about his thinking behind possibly increasing his hedge position in SDS (link). SDS is a double short SP500 exchange traded fund.

No positions

Pick six, top newsletter picks

Many, many moons ago, there was a time I would read the Dick Davis Digest newsletter. Davis would subscribe to most of the popular stock newsletters and then summarize his conclusions in his digest. Davis would look for stocks that were selected in multiple newsletters. Back in the day, those popular stocks tended to outperform.

It isn't Davis, it is Hulbert in this recent column (link). Hulbert highlights six stocks popular in the top performing newsletters. The list:
ABB JNJ MMM TAP SYMC WMT

As always, this isn't advice, or a recommendation to buy or sell. This blog focuses on my short term real money trades, and the thinking behind them. I make forays into the long term, but tend to only write about the long term in general terms, instead of posting every transaction.

As for the stock market, I didn't get the gap down that I was looking for, and the market ended up near unchanged for the day. Calendar seasonality tends towards more downside for the rest of this week. Friday or Monday may be a better entry point on the long side.

No positions

Rain falling? Will it last?

Like a summer thunderstorm, the rain drenches the stock market bulls, with a hard down day that closes at the lows for the day. If there is a significant gap down on tomorrow's open, it is worth a look on the long side. Better yet might be the three down days in a row, that total about 5%.

Support for SPY at 87.5, then 82.5, then 80 and 75. Like I've been writing, I think SPY 75 will contain any downside for the remainder of the calendar year.

No positions

1-1 for June option cycle

For the June option cycle I have one win SPY, and one loss MON. It nets out to break even before commissions, actual loss is cost of the commissions. For 2009, I am ever so slightly in the green, less than 1%.

Bare cupboard-declining option premiums

Option premiums have declined so it has been made for bare cupboard for put writers like me that are looking for low risk sells. The low premiums have me thinking about changing tactics.

A few movers today include Smuckers SJM with good earnings. Option premiums were too low for me to take action. Research in Motion RIMM flopped on their earnings. Carnival Cruises CCL popped up on decent earnings, beating their much lowered expectations due to swine flu.

Long SPY expiring tomorrow

Double dip? Three scoops?

The stock market has two significant down days, and I'm looking for a third. The market gets a lot more interesting on the long side, if it we get a third significant down day. Maybe it will be a full boat banana split and a 10% or more pullback. After this 40% rally off the lows, a pullback would be natural. At this point, a 33% or 50% or 66% pullback retracement would be healthier for the long term health of the stock market, than more rally.

SPY 88 is minor support. There is still lots of anecdotal reports about folks waiting for a pullback to get in, so any selling is likely to be contained.

Long SPY (expiring Friday)

Stop loss orders

On the PCGS forum there is some discussion on stop loss orders, and the like in this thread (link).

On this down day in the stock market it is a timely topic. Limiting losses is vital for traders, not so much for long term investors. I've touched on the subject of stop loss orders before in this February 23, 2009 entry (link2). It is uncanny that a good many investors buying in on 2/23/09 using stop losses would have been stopped out near the bottom and likely have missed most of the 40% rally off the lows.

Again, for long term value investors, stop losses are a poor strategy. The reason for buying is because of mispricing, a perceived bargain. A bargain that gets cheaper is even a better buy, time to load more. The reason to sell, isn't a lower price, it is a change in the fundamental story, or an acknowledgment that initial analysis of a bargain was wrong.

For long term value investors, diversification, asset allocation, gradualism are better long term strategies for success than tight stops. For traders, stops are essential, as is right sizing of positions and risk management.

As for traders, while no one goes into a trade to lose, it is predictable that certain types of traders will tend to lose. One group of predictable losers are novices that trade without a plan to cut their losses, novices that trade too big a size for their bankroll, that let emotion in to cloud their thinking. These folks are extremely likely to suffer big losses and lose their entire account. It is predictable.

Long SPY (expiring this Friday)

Bulls get frustrated and "play your game"

I've been writing about how frustrating the stock market has been for would be bears, with every recent dip met with buying. Thursday's early rally then sell off has a similar effect on would be bulls.

Natural Gas UNG, gold GLD, treasuries TLT all have more interesting action than the stock market. What I remind myself is that when I stray into those areas, I tend to have a much lower batting average.

I've been watching the NBA finals (basketball). Orlando coach Stan Van Gundy had some deceptively simple, yet profound bit of advice for one of his players, Rafer Alston: "play your game." Van Gundy was half kidding, half serious, yet it is sound advice for traders and investors. Those that are channel traders tend not to do well trading momentum breakouts. Those that focus on stocks and earnings (like me), tend not to do well trading commodities and bonds.

Sometimes I write that markets are the same all over, more alike than different. There is a lot of truth in that, but there are differences as well. Sometimes missing those detail differences is what causes trading losses.

Long SPY

A case for gradualism

Blogger Roger Nusbaum writes about gradualism in his June 9, 2009 entry (link):

>>
...if they [money managers or market timers] responded to the last meltdown by selling at precisely the wrong time why would they somehow handle the next meltdown differently?
...

The easy way to avoid this dilemma is to just avoid big bets. Selling everything is an enormous bet and is difficult to get right. ...

This dilemma is a big reason of why my approach is so gradualist. If you are going to participate in the stock market then you need to realize that occasionally the market will go down and thinking you can avoid any drawdown is unrealistic. All of my method around the 200 DMA is focused on going down less when the market looks like it will go down a lot. In that context selling everything is simply the wrong trade.
>>

For long termers, I am a big fan of gradualism. Strategies such as dollar-cost averaging, asset allocation, making small moves instead of big bold moves, are all part and parcel of that. Long term timing mechanisms such as the 200 day moving average, Dow Theory, Value Line appreciation projections are some tools that some use for long term timing.

Many folks, especially those relatively new to the market prefer big bold bets, or at least reading about them. In my experience, not many of those bold folks stick around, if they remain bold. Some of them are only bold on paper and don't put up any real money. Some of them are hindsight traders that only post after they have winners and don't write about their many losers.

As for the recent stock market action, today is about as dull as dull can be. It looks to me like "the calm before the calm." The market cliche "never short a dull market," comes to mind. The decline in volatility means slim pickings for those like me that like to sell options. Best to wait until a fatter pitch comes down the pike instead of swinging and missing at what is being thrown at the moment. There is almost always another opportunity, a better opportunity, usually soon.

Monday's late rally again slammed the door in the faces of those looking for a sharp pullback. That doesn't mean it can't or won't happen, but there has been a lot of money flowing in on every small dip.

Long SPY

Barrons: UNG and GLD

Barrons mentions natural gas as cheap relative to oil (UNG), and a GLD option play, buying the Jan 100 calls and selling the Jan 120s.
UNG article
GLD article

Most times, I lean the other way when I read option plays in Barrons.

Long SPY

Risk taking and happiness

Only tangentially on topic, but interesting to me, I found an article about risk taking and happiness, and a book on the subject at this link.

William Gurstelle writes:
>>
... here's the cool thing. I found that moderate, rational, risk takers, that is, those with scores between the mean and one standard deviation to the right are the people who are most satisfied with their lives. I call that area "the golden third" because it's roughly 1/3 of the population. Studies (and there are several) show that people who take just a bit more risks than average, that is, those who live their lives in the golden third, tend to do better than average. They tend to be more satisfied with their lives and more fulfilled. To me, that's a stunning conclusion.
>>

In stock market terms, it isn't easy to quantify where a person fits on the risk scale. Some mutual fund companies use a test to determine risk tolerance so they know what kind of investments might be most suitable for each individual. However, it is one thing to answer a test question under calm rational conditions with no money at stake, and another thing, to make decisions in real time under fluid conditions, when the decisions have consequences.

It reminds me of a true story about a would-be trader that signed up for an expensive advanced option course. During the many weeks of paper trading practice, the person did fine, winning much more often than losing. I don't know if the paper trading quotes were rigged so as to make winning easier or what, but when he started trading with real money, he managed a stunning eight losers in a row, and lost his entire stake in a few weeks.

Bears see their shadow

Bears see their shadow and go back to the cave. It has been lean times for most bears with some of the popular bear stocks such as CMG, GMCR moving up. Lean times for stock market chickens such as myself as well, but better that than the beating that many bears have been experiencing.

The stock market still seems to want to go up, treasuries still want to go down. A few retailers get hit on weak same store sales. Some like COST, recover by the end of the day.

Long SPY

The sun will come out ...

I was tempted to link the song "Tomorrow," with the tag line:
the sun will come out tomorrow / bet your bottom dollar that tomorrow there will be sun

A late rally cuts the stock market losses in half, so it might read: the sun has come out today.

It is difficult so sound an all clear after the three month rally we have seen. Still, it seems like buyers show up whenever there is a selling squall. That can continue, until complacency sets in, or a big external news event shakes things up, and then the rug can be pulled out. At this point, I am thinking that SPY 75 will contain any corrections for 2009 and would look for more longs on any minor dips.

Gold and other commodities have a correction day. Seems like normal action.

Long SPY

What the ?

What the ? The stock market accelerates to the upside after a push above the 200 DMA on Friday. I did not expect this move and for the most part I am not participating. If someone had outlined this strong rally scenario last Thursday, I would have said maybe 5% chance.

I am tempted to chase the rally, then remind myself that is where some of my big losers have come from. It is a high risk time to go long, especially via selling puts like I tend to do.

My secure thought is that at least I am not short and losing my shirt. There are few things worse than being short and losing big money when most traders are raking it in.

Long SPY

Pring: Historic breakout for Gold?

Noted technician Martin Pring is quoted on many websites saying:
"Gold could be on the verge of a historical breakout. Watch that $990-1,000 area like a hawk."
Marketwatch link

For those that don't know Martin Pring, he is the author of 25 books on technical analysis and trading (book list). Pring's books have been used to train many a trader.

As always, technical analysis is open to interpretation. Just because someone has written books on the subject doesn't guarantee that their calls will be correct. Traders that claim 100% track records tend to be liars, and/or hindsight traders that redo their trades after the fact and only trade on paper.

The term "historic breakout" is also open to interpretation. For some, a marginal new high to $1100 would be "historic." Some are looking at the width of the channel from $700 to $1000 to get a price target of $1300. One scenario that I am looking at is a rocket ship launch on earth shattering news and huge volume that takes gold to $3000 within a year.

Stock market (SPY) closes about the 200 day-moving average. As I mentioned, one scenario is a whipsaw move, after long termers think it is safe and get back in, take it down and whipsaw them out. (Many long termers use the 200 DMA as a timing tool.) That said, I think even if this unfolds, any correction is likely to be relatively modest (10% or less).

Positions: long SPY

Best time to buy bonds?

When is the best time to buy bonds? The common sense rule of thumb answer for long term bonds, is when the yield curve becomes inverted. An inverted yield curve is when short term bonds yield more than the long term bonds. This doesn't occur all that often. The last time was early in 2006. This Treasury dept link has data in text format for those that want to chew on some numbers.

Right now the yield curve has gotten quite a bit steeper, at least for treasury bonds. This means that despite the low yields for short term paper, it is a good time to stay with shorter maturities.

What is interesting is to compare and contrast the recent action of three bond ETFs:
TLT long term treasuries
BND corporate bond index
HYG high yield bond fund ("junk bonds")

TLT has been more volatile than BND. HYG and BND have been not gone down with TLT during the recent slide in Treasuries.

Positions: long SPY

Sell MON (cover short puts)

Buy back MON Jun 70 puts. Yikes. Monsanto says sales of herbicide RoundUp are way down and earnings will be hurt. Stock lower. I get out for a 100% loss (100% of option premium price, a small fractional dollar loss).

Market is acting terribly. I still am short SPY puts and that looks to be a dumb decision as well.

Long SPY

Buy SPY (sell puts)

Buy SPY via selling Jun 75 puts (16 points out). This looks like massive short covering after a strong consumer confidence reading. It certainly isn't the best entry point on the long side, however, there looks to be a lot of support for SPY in between 91 and my strike price. I believe there are a lot of folks still on the sidelines with cash waiting for a slight pullback to buy. SPY 75 is a 20% pullback from current levels.

TLT continues lower, and I continue to watch.

Positions: long MON, SPY

Buy MON (sell puts)

Buy MON via selling Jun 70 puts, 15 points out. Monsanto is lower after an analyst downgrade. Stock at support, even more support at lower prices.

I continue to watch TLT as it moves lower, nearing support at 92.5 to 90.

Vix flashing yellow, TLT TBT

Put selling, what I have been doing, may not be a good idea with the VIX going low. From a Barrons article

>>
This trading veteran, a former market maker who now trades options for his own account, believes buy writing and its cousin, put selling, makes sense when investors have correctly called the top in the VIX.

"The worst time for the play is at the nadir of VIX. That's a double whammy against you as a rising VIX, or a about-to-be rising VIX, implies not only higher volatilities, which sucks in the buy writers/put sellers, but rising volatilities almost always are a precursor to falling stock prices," my market wizard says.

Bottom line: Buyers beware.
>>

Treasuries may be an interesting play via TLT or TBT or options. The cover story of Barrons was on the prospects of Treasuries considering the looming budget deficits. Folks know that when I see a magazine cover, I am much more likely to go the other way. Treasuries also tend to be seasonal strong during June-to-September.

Waiting, watching, and India

As is often the case when a new option cycle begins, I am in the waiting and watching mode. There is quite of bit rollover option activity in and around expiration that generates noise. Wednesday may be an action day.

Election results in India are the catalyst for a 17% up move in their stock market. IBN and EPI are two that I am looking at. As is often the case, I prefer to wait for the dust to settle, and trade off the reaction to the primary move, than jumping into the fast market.

No trading positions

2-0 for April

Two winners for the April option cycle, MCD and VMI. Both positions experienced steep drawdowns, but I stuck with them. The pullbacks in these two stocks gave me pause when considering other longs. I waited for pullbacks in several other stocks and they did not come, or were too shallow.

So, what now? I am in the economist mode, "on the one hand, on the other hand." On one hand, the rally off the lows is extended. On the other hand, a lot of folks are looking for a steep drop. This week, SPY was down about 5%. That's pretty steep for one week, but in the context of a 32% gain off the lows, 5% isn't so much.

Two books about options

Bill Luby at Vix and More (link) mentions two books:

Trading Options at Expiration
Strategies and Models for Winning the Endgame
by Jeff Augen
Amazon link

and

The Volatility Edge in Options Trading
New Technical Strategies for Investing in Unstable Markets
also by Jeff Augen
Amazon link


The first focuses on the three days before expiration and explores strategies such as ratio spreads. The second is described as an academic book. Like virtually everything else in this blog I make no recommendation.

Stock market not doing too well this morning. We will see if the selling storm intensifies, or the sun will come out with a rainbow again like other recent selling squalls.

Long MCD, VMI

No vertical

I considered shorting SPY today by doing a vertical put spread, selling the Jun 75 put, buying the Jun 85 put. The stock market selling squall again dissipates quickly. Quite a few folks missed the rally and want a pullback to get in. The sell in May folks are also wanting a sell off. Only rarely does the market give the majority what they want.

Long MCD, VMI both expiring this Friday

200 day moving average

SPY is within spitting distance of its 200 day simple moving average (one year chart). One scenario is for it to cross, get a few long termers in and then whipsaw them out. Some use the 200 dma as a long term timing indicator.

Long MCD, VMI

Bears on the run

The market reaction to the employment report and the stress test has the bears scurrying for cover. The stock market bears are already battered and bruised after eight weeks of almost straight up rally, which has sent SPY up over 30% from the lows.

Obviously, some traders have made huge money during this run. Especially those very few lucky ones to load the boat at the bottom. V-shaped chart bottoms are rare, and notoriously difficult to trade.

For long termers, there are going to be much lower risk buying opportunities down the road. Right now, it is high risk to be shorting as well as adding longs. That familiar tune is one that many a trader has been repeating during the eight week rally.

Long MCD, VMI

Treasury bonds falling

Treasury bonds continue their recent slide. Here is 5-year chart of the 30 bond yield (link). At 4.28% the move from the panic low of 2.8% December 2008 is dramatic.

Stock market is down. I don't think this squall will get particularly nasty.

Long MCD, VMI

"Hedge hog" sighting

Two of the bloggers I read, recently hedged their longs, Nusbaum at Random Roger (link), Frankola at Student Stocks (link2). Random Roger hedges with SDS, the student BGZ. Frankola with BGZ already got stopped out on this morning's early pop, if he did what he wrote.

It is interesting for me, to see the market veteran ETF heavy Random Roger, and the finance major student with large positions in speculative stocks, both come to the same crossroads at the same time.

Readers know that in this trading blog, virtually every position I initiate is hedged when I go in. The strength in the market and the quietness, makes me believe it is unlikely for a big drop at the moment. There was a market squall overnight with U. S. stock futures down overseas, but by the time the New York open came, more news had come out and the storm had passed.

In reading Random Roger's blog, I find he is often early (as am I). So while it is getting late at the party, I think it is a while yet before the bears show up and take away the punch bowl.

MCD finally acting better. For long termers it is nothing to get excited about. For me with short puts expiring on 5/15/09, it may be all I need.

Long MCD, VMI

I didn't expect a big rally

Wow, 200 points up, SPY now up for the calendar year (since Jan 1)! If anything I would have bet on a 200 point down day or two during this time of May.

MCD didn't participate, and that is distressing. MCD has good chart support at 51. That list of stocks I was watching have all moved up without me loading up.

There are quite a few articles about "sell in May and go away" [until Halloween] floating around. Hard for me to see that working so easily and smoothly with so much publicity around it. Often times once a simple indicator such as seasonality gets widely published, it tends to stop working, sometimes the reverse trade becomes the new winner.

Long MCD, VMI

April recap at Marketwatch

From an April recap article at Marketwatch (link)

>>
"The earnings season in general has been better than expected, with 68% of the S&P 500 reporting upside surprises, and we're three-quarters of the way done," said Art Hogan, chief market strategist, Jefferies & Co.
...

Historical trends bode well for the U.S. stock market in looking 10 to 12 months ahead, yet Greenhaus also cautions the shorter-term picture remains a choppy one, given "low earnings visibility, macroeconomic uncertainty and a volatile political environment."
>>

Elsewhere, FSLR burns the shorts with an upside gap on strong earnings. I kept waiting for FSLR to come back during the day, but mostly, it kept powering on up.

Long MCD, VMI

Free lunches? Not for long

Adam Warner has been writing about gaming the triple ETFs with late day buying, or selling and rebalancing. This weekend there was an article in Barrons mentioning this tactic, and the author was swarmed with armchair punters asking questions. Warner posts part of the response (link):

>>
I'm sorry if I left the misimpression that I was offering some sort of "how to" guide to game the ETF action near the close. In fact, I was alarmed and dismayed at the number of folks who seem interested in trying this. Don't. The people who employ many PhD.'s and much computing power in this area have already crunched the math and written the algorithms to try and exploit these factors.

Most likely they're busy working on ways to get on the other side of this trade already. If anything, the widening recognition of these effects suggest that the game is getting too crowded to continue "working" in a reliable fashion. As soon as you think you have figured out a way to get a free lunch, the market typically presents you with the check....
>>

The last bit is illuminating. Any time a new sure-fire indicator, or sure-fire trade surfaces and gets publicized, traders typically rush in, trying to gravy train. Often times, it becomes so skewed that the opposite trade becomes the money maker, at least in the short term. This is how markets work, and why it is difficult to beat the market over time.

Novices sometimes believe all they have to do is read a book and identify a chart pattern or two, perhaps a seasonal tendency or two, and it will be free lunches all around. Usually, such lunches tend to be taken away quickly.

As I often mention, risk management, right sizing of positions, money management are at least as important as figuring out up, down, or sideways.

As for the market, much fuss over the swine flu. I don't have much to add, other than noting resilience in most stocks. If the market wanted to tank big time, the news background was there for it to happen. That said, there is a seasonal tendency for a couple of hard down days, early May.

Long MCD, VMI

Another "good" idea: 130/30 funds

This week's Barrons has this blurb (link)
>>
Quant funds -- also pummeled in last year's selling storms -- typically buy "high quality" stocks and short "low quality" ones, as defined by balance sheets and valuation and other factors. It's been precisely the wrong approach lately, as low-priced and financially shaky stocks have led.
>>

Back when the bull market was going strong, 130/30 hedge funds sprang up like weeds. The concept is to buy the best stocks, short the worst and profit on both sides. The "problem" is trying to find that dividing line. An 130/30 fund shorts what they see as the 30% of stocks that are going to move lower, and then use that money to leverage 130% long on stocks that will move higher.

When it works, the profits might be substantial. When it doesn't, it is crash and burn time. Leverage and shorting can produce particularly large losses. As stocks move from column "A" to column "B" huge swings might occur. Not only would the stock be sold, the stock would be actively shorted.

The old Will Rodgers saw comes to mind:
"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

C'est la vie

While the stock market went down for the week, breaking a string of six up weeks, it was a tough week for bears. Many big name stocks, such as AAPL, AMZN moved higher on earnings. After Monday's big sell off, and so many earning reports, it looked like it might be another good week for put buyers and others betting on down moves.

My two positions did not benefit much from today's rally. I was watching a list of six other stocks (DO, NOV, CHRW, CNX, SLB, AMGN) that I might want to get in on a pull back but no dice. Those six all held steady or moved higher, while the two I did pull the trigger on faded. C'est la vie (such is life).

Bonds are sending mixed signals. Treasuries TLT are moving lower. Investment grade corporates BND are steady. High yield bonds (or junk bonds) HYG are moving modestly higher. GLD had a good week.

Long MCD, VMI

Buy MCD (sell puts)

Buy MCD via selling May 50 puts
Stock waffles on earnings report, moving higher early, now lower. Chart support at 51.

Long VMI, MCD

Too small a window

This morning's early sell off was a window for would be bulls to sneak in. It closed quickly after Treasury Secretary Geithner made some positive comments. I didn't get in the window.

My VMI position saw a huge drawdown during Monday's sell off. Often that much of a quick move would have been enough for me to be stopped out. The price action in the stock wasn't as scary as the movement in the option price.

Long VMI

1-0 for April expiration cycle

I have one trade for the April option cycle, a winner in AZO. That small and useful profit puts the blog reported trades into the black for calendar 2009. Hooray!

SPY is up 21 points off its low around 66, with this the sixth up week in a row. Like I often write, only a few lucky folks (and a lot of liars and hindsight traders) bought at the bottom. Almost everyone (including me) was skeptical after the 400 point Dow up day that started this rally. Few believed it would continue to run for another six weeks, almost straight up, forming a rare V-shaped bottom on the chart.

That said, the long term SPY 5-year chart still looks like heck (link). Lower lows are out there, but not in the near term. For the time being, the bear has been turned back. I believe any dips are likely to be contained by support at SPY 75.

SPY closed 12/31/08 at 90.24 and is only about three points away from going positive for the year (87.08 today). Meanwhile, GLD has gone negative for 2009, starting the year at 86.52, and now at 85.22. Who would have imagined that stocks and gold would be about even for the year at this date? Not me.

I took a glance at seasonal tendencies for GLD and further weakness into June/July is indicated. The caveat, as always, is that seasonal indicators are among the weakest and least reliable, and that news events can overwhelm technical or seasonal indications.

I go into the May cycle long VMI.

Buy VMI Valmont (sell puts)

Sell VMI May 50 puts, stock up on earnings. Good fundamentals (stat page link), decent chart (link2). I may double up if the stock falls back to fill the gap at 55, currently 63.9 up big on the earnings.

Positions long VMI, AZO (expiring today)

Barrons: Stage set for bears?

Michael Khan, in a recent Barrons article on technical indicators pointing to a stock market decline.

>> ...
The stage has been set for the bears to take over, and while they have not done so yet, the risk for investors jumping in now is just too high. ...
>>

Articles like these in popular publications lessen the odds of the outlined decline. Today's late rally on "witching Wednesday" (Wed before options expiration, shows resilience. If the market wanted to go down, today was a good day to take it down, with a weak earnings report from goliath Intel.

Long AZO

Cold feet on GS

I didn't pull the trigger on GS today. The chart is a nice short set up (link). Earnings were good, but secondary offering is going to mean dilution. First thought was to sell out of the money calls. Premium from call sale didn't seem worth the risk, even though the percentage of success was high.

Other movers include GWW, DNDN. I don't have much to add. The stock market is a bit overbought. I continue to be cautious as I have been for the past six months.

Long AZO expiring Friday 4/17

The bearish case (Barrons)

Barrons presents some bearish technical arguments (link).

>>
Put together the mediocre momentum, falling volume and sentiment that shows the rapid loss of fear and we get a recipe for a selloff.
>>

There is another article in Barrons about using puts to hedge (link2).

Mix it all in the bowl, and the most likely scenario seems to be sideways with a slight downward bias. Of course as RIMM demonstrated with its recent 20% up day, individuals stocks can have big moves on their earnings.

The other shoe?

Bill Luby at Vix and More writes about traders waiting for the other shoe (link).

>>
... it is clear that there is a strong contingent of veteran investors who anticipate not only that the next shoe will drop soon, but that the fallout will be at least as bad as what we experienced during the October-November peak of the crisis.

While I am not ruling out anything at this stage, I do not see the VIX spiking above 60 in the near future, nor do I even see a VIX above 50 as a likely scenario.
...
>>

The other shoe is one scenario, however, it seems to me that too many traders are skittish, and thinking that the current rally will be like the Dec 2008 rally, quickly folding and eventually making new lows. Right now, the anecdotal sentiment is such that it makes a quick return to lows unlikely.

What seems more likely to me, is that any short term decline will find support at SPY 75. April is traditionally one of the best months for the stock market, with late IRA money often flowing in, as well as any tax refunds being reinvested in stocks.

Having said that, I don't see that much that seems worth taking a position in. I'll keep looking.

Position: long AZO

Earnings season

Stock market down hard today. There is minor support at 80 and then at 75. "Earnings season" starts officially today with Alcoa (AA). More than any other factor it is earnings that drive stock prices.

Long AZO

Buy AZO (sell puts)

Buy AZO via selling Apr 135 puts. AZO lower today after analysts downgrades. Chart support at the breakout gap from 140 (to 150).

Mark to market--wow

Wow, the stock market roars to life when the new rules for mark to market accounting are announced. Financial companies have been wanting this.

I think I will go back to the drawing board. I sat out most of this rally. Thankfully, I am not short. If I was, I would cover. The timing of this latest announcement had the potential to do a lot more damage to shorts.

All quiet on the options front

From Barrons online (link):

>>
"It's so quiet here," a trader on a major options desk said on Tuesday, requesting anonymity because he is not allowed to speak to the media. "It's hard to buy the market after this run-up, and it's hard to short when you may be in the middle of a strong bear-market rally."
>>

That about sums it up. I was tempted to do a couple of trades today, then told myself, that better, lower risk, opportunities are coming. Soon.

Could have been worse

Monday's stock market decline could have been much worse. Some modest buying during the last hour brings the market off the lows. Bulls need not take too much heart from this, but bears can be discouraged. I didn't find much going cheap. I was thinking the rally would hold until Wednesday or so, obviously that was a bit off.

I am still waiting on the sidelines, the market remains too fast for my taste.

Expert advice lowers brain activity?

Future Pundit has an article citing lower brain activity after an expert gives their advice (link).

This makes some sense on a lot of levels. If a person is given a puzzle or a decision to make, and then someone else tells them how to solve the puzzle or recommends a course of action, that person is less likely to spend time thinking about the question.

As for the stock market, I think the rally phase isn't done yet, but it is getting close. A lot of shorts got burned by huge moves in popular stocks for shorting such as FSLR. The scare caused by the Treasury action got unspooked a day later by a successful auction. It is that kind of market, where markets move quickly.

No positions

Treasury auction spooks market

Another wild day, as the stock market stumbles after a weak Treasury auction (link), then rights itself and powers into a strong close.

When the Fed announced its $300 billion buy back of Treasuries, I expressed skepticism and said to see what the market verdict would be. A good bit of that day's gains in T-bonds has been given back, stocks have continued higher, gold has mostly held its gains. As always, I find it useful to listen to what the market is saying.

Time and price

SPY has completed the 50% price retracement, when measuring from the January high to the recent low. The time for this retracement isn't up yet, another week or so, would be my expectation and then another leg down.

The Fed and Treasury might have really burned some shorts by making some key announcements when they did. Some would say it is on purpose, some would say the powers that be aren't that smart.

The announcement of the $300 billion buy into Treasuries just after SPY completed the trip to the price target and a lot of technically oriented shorts got in. The unveiling of the new asset plan over the weekend after option expiration had the potential to do a lot of financial damage to position traders that were short.

Some might call that blatant manipulation, some might call it smart tactics. Whatever, traders need to stay on their toes, no telling what other surprises they have up their sleeves.

The market is moving too fast for me to get a clear read. Like I wrote at the beginning of this entry, perhaps in a week or so, the water will be clearer.

No positions

2-0-1 for March, Fed buying Treasuries

For the March option cycle: I have 2 winners, 0 losers, 1 breakeven profit (AZO).
The two winners are little minnows (DNA, ROH), but I will take them. I am slightly in the red for 2009, with a record of 2-2-1 (wins, losses, ties).

I am not sure what to make of the Federal Reserve buying Treasury bonds. I have heard some comments such as: "it's like moving money from one pocket to the other and saying you've doubled your money." I am known for letting the market talk and me listening. With that in mind the huge rally (biggest one day up move since 1962) in bonds is worth listening to.

We will see if the bond rally can hold, or will fade. If it is just a money shuffling scheme as some are saying, in theory, the market figures that out soon and bond prices will fall back.

No positions

Wild witching Wednesday

Wow, wild witching Wednesday (the Wed before option expiration) makes for a breath taking day for most markets. The Fed plan to buy Treasuries shakes up most markets: bond yields fall, stocks rally, gold moves up.

Before the news, I placed an order to sell Apr 25 puts on DRI splitting the bid/ask, but the huge rally meant the order didn't get filled.

Long DNA, ROH expiring Friday 3/20

Strong close

Some bears took heart on Monday, with the mid-day rally fizzling. Tuesday shows strength into the close and hits the bears over the head again. Normal bear market rally action would take us to SPY 80, about 20% off the lows and chart resistance.

I look at quite a few of the movers such as AAPL, FSLR, NUE. At the end of the day, I conclude that I am blundering around looking for a trade to make because I have mostly sat out what is now about a 14% rally off the lows. Wednesday before option expiration may bring more wide swings. I may look for some more cigar puff options into expiration, right now pickings are slim, or seem too risky for the premium being offered.

Long ROH, DNA, both expiring Friday 3/20

Four up days in a row

Friday makes four up days in a row. I wish I could go back in time and load the short term boat on Monday. I am sure I have lots of company.

Short, sharp rallies are normal activity during bear markets, and for now this fits that mold. There is chart resistance at SPY 80, so SPY 79/80 might be a place to look for shorts. I am leaning that way already, I remind myself that I tend to be early.

Enjoy the weekend.

Long DNA, ROH

Impressed by the rally

I am impressed with the strength of today's rally. I still think it is mostly short covering and short term traders. SPY is about 13% off its recent low. So if this is a typical 20% bear market rally, that means it is 2/3 over. Of course, the stock market has been anything but typical lately.

I feel a strong urge to add longs today. That often means we are closer to the top. I resist the urge. Good news is that the DNA merger deal seems signed and sealed now. For now, I am content with the two small minnows in my net, while waiting for a better chance at some bigger fish.

Positions: long ROH, DNA

Buy DNA (sell puts)

Buy DNA via selling Mar 70 puts. Another deal, though this one isn't approved yet. Support at 82 if the deal fails. Those familiar with the Buffett biography “The Snowball,” this is a cigar puff option. Odds seem extremely high that the option expires worthless.

As for the overall market, there is some follow through this morning. I won't get too excited about it, though.

Positions: long ROH, DNA

Buy ROH (sell puts)

Buy ROH via selling the Mar 60 puts. ROH looks like a done deal with the stock trading very close to the deal price of $78 (77.82). There is a sliver of premium left in the puts, so some level of disconnect or some folks feeling the need to hang on to insurance.

As for today's rally, I often get burned when chasing, so don't want to do that. There are some stocks that I am looking at.

Barrons 10 stocks for the long haul

Stockpickr.com takes a look (link).

KOF MSFT ACE WYNN EMC
CERN WLP GOOG EBAY CVS

As always, do you own diligence, and don't believe everything you read in the papers or on the Internet.

It could have been worse

Lower lows means the bears are still in the captain's chair even though SPY eeks out a gain on Friday. We did get a decent morning rally, likely due to short covering, then the seemingly relentless tide of selling came back. The strength into the close might again be short covering. Shorts had a huge money making week, so some may want to cash some chips and celebrate the weekend.

To my mind, there are so many cross currents in the market, so little clarity. Yes, the nimble and the bold (and the lucky) can make money, but I am neither nimble nor bold. The not so nimble, and the foolish can lose their shirts.

The prior low on SPY didn't hold, so that is bearish. There is enough energy for a huge stock market rally winding and winding like a spring. So far it is all potential energy. If I miss a rally, so be it, I'll live another day. Compare that to many would-be market heroes and TV personalities that have called a dozen market bottoms since 2009 started and have huge losses to show for their efforts.

Sell AZO plus coffee shop predictions

Sell AZO via covering short Mar 125 puts
Stock market is in full melt down mode as I type, making new lows yet again. I step aside and get out with a breakeven profit (commissions are more than my profit).

Friday may bring a big rally on the employment report, but readers know my rule: "Never let a profit turn into a loss," especially after a losing streak.

I was at a coffee shop and heard two predictions on the stock market. For three years from now, one predicted Dow 12000, the other said 15000. I didn't offer my extremely gloomy numbers that I recently wrote about (3000 Dow), not wanting to sour the mood. This story does not reassure me because if means there are still more investors to sell. If I had to bet 12000 vs. 4000 Dow in March 2012, I would say the odds are higher for 4000.

Keep in mind, that I generally avoid making predictions. I see predictions more as entertainment than as useful for trading. I usually look for a move, and trade the reaction from that move, instead of trying to predict.

No positions

Relief Rally and the GE bogeyman

The stock market gets a relief rally. News from China about a government stimulus program over there, cheers some investors.

GE doesn't benefit and continues its race to the bottom (link to Marketwatch article). The dividend cut was a good reason for many to sell. Where is the bottom? I don't know. Readers will remember, that I don't like playing that game. I'd rather see a bottom established and then retested before going long.

With that in mind, the Tuesday low on SPY is an intriguing chart point. I think the market has one more sell off before a modest multi-day rally can take hold.

Positions: long AZO

Buy AZO (sell puts)

Buy AZO via selling Mar 125 puts

AZO higher on earnings. People are keeping their cars longer and spending more at the Autozone stores. Company doesn't issue guidance. Support at 145, 135, and the latter would be the mental stop, currently around 152.

It is a bit scary selling puts in this stock market. The chart looks good, and the earnings look decent. The balance sheet not so much, but this is only for the 17 days until option expiration.

SPY limbo, how low can it go?

At times like this is a good to take in some historical perspective. Henry Blodget at BusinessInsider has this on P/E ratios (link).

[these numbers are if earnings don't grow and SPY just goes down to the targets]
>>
... if the S&P fell straight to the high-end of its previous trough range (8X PE, or 460), it would fall another 35% from today's level (700)

If the S&P fell straight to the low-end of its previous trough range (5X PE, or 300), it would fall another 55+% from today's level.
>>

So, the market is not historically cheap yet, not based on current earnings. SPY 300!? Dow 3000? That would not be a pretty picture and would likely coincide with a major economic depression. Let's hope things don't get that bad. The chart does project that low. SPY 600 is some support, but it is not major support on the long term chart, not really.

I didn't get the smash down at the open that I was looking for. It is a good time to be patient for positions traders, considering the severe oversold condition and huge downside momentum. Being oversold makes it risky to be short, the downside momentum makes it risky to be long.

Another ugly down day

Monday is another ugly day on the downside for stocks. If we get a gap down equal to today's move on tomorrow's open, it might be worth a shot at the long side, but only for the short term. Down 10% in three day is extra oversold, but as we have all learned oversold often turns into oversold-er. Sentiment still hasn't reached fever pitch, so there are more people to sell.

To be honest, I am a bit shellshocked at the rapidity and severity of the downside action.

Buffett: "Small birds at a Badminton game"

Business Week has an article about the annual letter from Warren Buffett at Berkshire Hathaway BRK.A and BRK.B (link).

>>
"By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game."
>>

Yikes! Buffett points out specific stocks where he was the shuttle hit by the racket. Conoco Phillips bought when oil was peaking, and two Irish banks that seemed cheap when bought, but declined another 90% from the buy in price.

>>
"Last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.

"I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

"I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89 percent loss. Since then, the two stocks have declined even further.

"The tennis crowd would call my mistakes 'unforced errors.'"
>>

Worst February since 1933

The Wall Street Journal has an article about the brutal start to 2009 (link).

>>
The Dow Jones Industrial Average dropped 119.15 points, or 1.7%, to end at 7062.93. The blue-chip benchmark ended down 937.93 points, or 11.72% on the month -- the worst percentage drop for February since 1933, when it fell 15.62%. The Dow industrials have fallen six months in a row and are now more than 50% off their record highs hit in October of 2007.
>>

Investor sentiment remains relatively complacent given this kind of tape action. The stock market tries to look ahead six months.

I like to tell the story about when my dad first started investing. The stock market was near a top in 1967, it went sideways for a while before spiraling down in 1973/74.

After losing 60% to 70% of his money, dad wanted to sell all his stocks and mutual funds near the bottom. My mom, who had been against the entire idea of investing in the first place, told my dad that he was an idiot. That after a 70% decline it wasn't time to sell, that it was time to buy. My dad ended up doubling his monthly mutual fund purchases. In hindsight, we all know things did turn out okay, and increasing the stock allocation was a smart move.

I'm not saying we are anywhere near a bottom. In fact, I don't think anything more than a short term trading bottom is close in price or in time. The stock market did recover from the 1974 lows, as it did in the 1930s. However, the ride was bumpy and had a lot of false starts before a new long term bull market came to Wall Street. There is also the case of Japan, where demographics and other factors might mean that their stock market may take another 50 years to reach their old 1980s bull market peak. The long run, might turn out to be very long here in the U. S. as well. No one knows for sure.

There are no guarantees in the stock market. Only a few lucky people will buy at the bottom. For the masses, age appropriate asset allocation, right sizing of positions, still seem the best way to go. I would like to believe that I am some kind of financial genius, but the record shows that I am not. For the average person, average results, or slightly above average, are a fine target.

Another shoe drops

2008 Q4 GDP (Gross Domestic product) comes in weak. The stock market drops at the open and SPY breaks its November lows. We will see if there is a close below the lows.

It is not time to be the hero. Sentiment remains relatively complacent. The decline remains orderly with some stocks still showing strength. Valuation is difficult because what is reported on balance sheets is only part of the story. Liquidation value is even more difficult because of the credit environment.

For folks that have little exposure, this isn't a bad time to start edging in. For folks that never sold and are still 100% in, selling a small fraction would be a good way to go. For most people, all-in or all-out investment decisions usually turn out to be bad ones.

I rarely talk about my long term investments here because this is a trading blog. I have a small percentage of assets in stock ETFs for the long term. Like most stock investors, I am taking a terrible beating on those holdings. I am also adding more every week to a stock mutual fund in my IRA account in a steady manner. Lower prices mean I get to buy more cheaper. The dollar amounts and asset allocation percentages are relatively small.

I am looking for a sentiment fear peak to look to increase my long term exposure to stocks. It isn't here yet. Right now, it doesn't look close. I also have that gold/silver insurance policy that I believe everyone should have (a small percentage of net worth in hard assets that is never touched).

No trading positions.
Chicken sign still up (as opposed to a bull or bear)

Yo-yo market and Student stock blog

I skipped making an entry yesterday, title might have been "not buying Bernanke," meaning to avoid buying that rally. So far this morning, the yo-yo market is on the way back down.

I stumbled on a student stock blog (link). Sometimes that "beginners mind," can give clarity, where a veteran has too many memories, too many scars to give a clear read. This is certainly an interesting time to be starting out in the stock market.

My own history is that I made my first few trades in the summer of 1987. Many will remember what happened in October 1987 (a big stock market crash). Those early days certainly have colored my thinking, and likely have made me much more cautious than someone who cut their teeth during roaring bull markets.

As for the market, it still seems a difficult one to trade for position traders such as myself.

Jaffe on Stop loss orders

In Chuck Jaffe's ongoing column "Stupid Investment of the Week," (MarketWatch link) he opines that it is stupid for investors to forego stop-loss orders. Excuse me for pointing out the obvious, but after a 50% Dow decline is that the time to be saying this kind of thing?

Readers know I cut my losses all the time, often ruthlessly and with little emotion, even if I am convinced my trade will turn a profit in the end. Keep in mind that this blog is about short term trades, mostly selling short put options, so one big loser can snowball into epic size.

The other side to think about is value investing, buying a stock or sector, or the entire market for the long term because it is cheap based on valuation models. For value investors, bottom fishers and the like, stop losses are a poor way to proceed. Better to take a small position first, then be ready to double up, if it moves against you. For value investors, diversification and right sizing positions are more of a bulwark against losses than cutting the losers.

It is interesting to note that Warren Buffett has always been one to take big positions, from his early days to when he made huge fortunes. The caveat is that few of us are like Buffett. Most would-be Buffett's get wiped out because they turn out to be wrong, and one of their huge bets turn against them and wipes them out.

It's a Mad, Mad, Mad, Mad World

For whatever reasons, today's trading has me thinking about this old movie (Wikipedia link). The question is, "will I be able to find the big W?" Stay tuned.

The SPY Feb 75 puts I recently closed out would have been profitable had I held until expiration, but certainly would have been a scary ride. Chart support at SPY 75 held for today at least.

Gold makes another recovery high. Best case scenario for long term gold bulls would be a basing period of two months or more, followed by a parabolic up move on huge volume.

Going forward, the stock market almanac leans bullish towards the end of February and early March. Some stocks such as PCLN are showing strength. The "chicken sign" (as opposed to bull or bear) is still up for this blog.

So far I've had two modest losing trades for 2009. As always, it could be better, could be worse (a lot worse). I remind myself that two small losers isn't bad considering the beating the stock market has taken, and trades I typically do. Sure there are a few folks making money by aggressively shorting and buying puts, but a much larger group of traders and investors are taking huge losses with each leg down.

One measurement would be to take the width of the recent SPY range and then project that as the move down. A look at the 3 month SPY chart (link) says 80 to 92 is the recent range, 12 points from 80 brings a target of SPY 68. An inexact target to be sure, but it is one look at it.

Sentiment points to lower lows

Mark Hulbert looks at sentiment and retesting of lows in this Marketwatch article (link).

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... on my reading of these four sentiment measures, the story that is most consistent with the data is that the stock market will fail its retest of the November low.
>>

The four sentiment measures are Investors Intelligence, American Association of Individual Investors survey, Hulbert Newsletter sentiment index, VIX. None of the four are more bearish than at the November market lows.

Sell SPY buy back short puts

Sell SPY buy back short Feb 75 puts
I have thoughts of doubling down because SPY 75 seems like strong support, and it would not be a bad place to take delivery of stock, if it came to that. Instead, I close my position and take my loss. It is a large percentage loss, though small in dollar terms.

Back to no positions.

Elsewhere, GLD has a nice up day. Money is reported to be flowing into the ETF. Japan reports a sharp decline in GDP. If annualized that quarterly rate would spell DEPRESSION.

Buy SPY (sell puts)

Buy SPY via selling Feb 75 puts

Stock market manages a positive close after a steep slide. For SPY, 75 looks to be reasonable support given the time frame. ThinkorSwim analyzer gives a 5% chance that SPY goes below 75 by expiration on 2/20.

Elsewhere, GLD makes a 7-month high. If anything I lean bearish, the volume spike yesterday, is sometimes a day or two from an intermediate top. The long term fundamentals are still bullish for gold. However, after the bull run, and all the press gold is getting, it may be ready for a breather.

Positions: Long SPY

Market up, market down, more on Buffett

I'm reminded of the old joke, if you don't like the weather, stick around it will change soon enough.

So it is with the stock market. All the optimism from last week is washed away in a few minutes. The bulls might encouraged that the Asian markets and overnight futures seem to be hold steady. I would rather see a washout on tomorrow's open, but lately the market hasn't given me what I wanted. Some folks put a bear or bull on the page so it can be seen at a glance where they stand. I'm still stamping the page with a chicken.

I continue to read "The Snowball," the Warren Buffett bio. Buffett was a millionaire by age 30, when a million dollars was a lot of money. Buffett did a number of things that I did not know. As a kid he collected coins, stamps and bottle caps. As a teenager he liked betting on horses. As a new stockbroker he picked some stocks that did poorly. One of his early investments involved a takeover that resulted in massive layoffs. The human costs of that takeover scarred him so much that he never did that kind of thing again.

Some things did not surprise me, such as him being a tightwad with his money, that he did the taxes and kept the books by himself for his investment firm for many years, that he learned from Benjamin Graham at Columbia, and then at Graham's firm, that Buffett made a lot of money on Geico.

I am now reading about Buffett and Charles Munger. Munger taught Buffett about the value of brand names and franchises. Graham's style is more to look at a company's liquidation value. Munger was more interested in what made for great companies. This led to Buffett taking a huge stake in American Express, and later Coca Cola and Gillette.

Still no trading positions.

Dog bites man: Cramer picks not so good

I don't think any of my readers would be surprised by this bit that was in Barrons:

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Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.
>>

I read it on Adams Option blog

Missed the boat

I missed the boat for Friday's 200+ point Dow rally. These things happen, and are distressing not dangerous. Better to miss the boat than get on one that sinks.

Silver got back above $13.

The Snowball - Buffett biography

Being patient is boring, probably even more so for any readers of this blog.

Not much that looked interesting in terms of risk/reward. If I had to guess, I'd guess the stock market has another bear leg down in it, but I don't have much idea as to the time frame.

Warren Buffett increased his stake in BNI Burlington Northern, being exercised on puts sold at $75. Someone like Buffett almost has to buy on the way down, because if he tried to play the momentum game, his size would make it impossible to get in or out.

I've started reading the book "The Snowball." It is a thick book, and interesting in parts, slow in others. Buffett was a "prodigy" at business, making more at age 17 than most of his high school teachers.

Buffett's investment philosophy is real simple, look for businesses that are easy to run, that have a clear advantage that is hard to replicate, and that is selling for below its true value. Simple in theory, hard in practice, when there are thousands of other very intelligent people looking for the same ideas.

I was surprised to learn that Buffett's dad, Howard, was considered an arch-conservative and a strong supporter of the gold standard, and believed that the U. S. government was sure to default in the near future. The gold stuff obviously didn't rub off on the son.