As I prepare for the week, I can’t help but to hear the real news. The US economy is crap, 40% of the S&Ps earnings are derived from oversees, housing market in the toilet (and should decrease by another 20%),Credit Card balances are at an all-time high (and rising at an unprecedented rate), savings is at an all-time low rate (0%), and the threat of raising the Capital Gains taxes by the Dems.
All that and the market averages continue to rise. As well they should. The bear needs to take a breather. I managed to play the bounces from the downtrend, and the uptrending lines very well the past two week. I managed to adjust the Deltas in my portfolio to play a drop then bounce, all the while keeping Theta decay firmly on my side. Personally I would like to see the averages drop 3% in the next few days, but the bottoming tails of Wednesday and Friday make me wonder. Fundamentally, the 40% oversees profit exposure should offer some lift to the S&P (unlike the Russell).
As I look at the chart, I have three possible trades (assuming further range consolidation):
1) if the market drops to the uptrend line I will get long with a May BWB or credit spread.
2) if the market surges to the downtrend line I will probably do the same thing.
3) buy a May 137/140/143 butterfly and see if the market will fly right into the “consolidation net”. That seems like an interesting possibility. A very inexpensive way to play this. .60 for the call or put butterfly. The put butterfly eliminates my dividend risk due to early assignment. Also my profit zone is between 137.6 and 142.4, with a potential 4:1 reward to risk (spy @ 139.6). This strategy will probably work out best if put on prior to the Fed announcement while IV should see a bump.
The 4th possibility (and possibly likely):
I will be looking for a breakout from consolidation. And I feel like the path of least resistance is up.
As I prepare this post, I sit slightly Delta positive (+3 Deltas – beta weighted to the SPX), and 350 positive theta points.
Now the IWM (Russell 2000) – This is much weaker than the S&P. Technically, the upmove has been on very weak volume, and the DMI shows very little trend. Fundamentally, it has much less exposure to the Global Market (I don’t know the figure, but if you do send it to me with the place to find it). It has found it’s 38.2% retracement and has touched the PRIMARY downtrend line. It has much less reason to rally. I have a few nice 71c and half as many 67p – 2 month calendars to take advantage of sideways to slightly down action.
I would be very surprised to see the IWM get much above 72.90 (bollinger band and previous high)
There has been a lot of talk about the power of the Nasdaq, although MSFT put some holes into that thesis last week. I haven’t looked at it in awhile. Let’s see.
I can see NO reason to own the Nasdaq long here. There is significant resistance here. 200 day MA, 50% retracement, downtrend lines. Yuck. There looks to be 2.5pts to the downside, and .50 of upside. I will be selling this into strength. Selling at 47.80 looks great to me.
Well, I have reviewed an index of 500, 2000, and 100. And what would a review be without reviewing a composite of what the public thinks of the stock market. An index of 30 stocks. Although, these are Global in scope (so they should be the strongest, well see).
It certainly is strong in comparison to the other charts. i.e. The Dow has moved above it’s primary uptrend line from 2003. Large bottoming tail on friday. And it would not surprise me to see a shooting star being formed bouncing on the underside of the 200 day MA @ 13,070. But I would like to see a high volume breakout if I were to turn bullish here. Until then, it has not broken the primary downtrend and this ain’t no friend of mine.
The media and politicians and everybody else who has said we are in the biggest financial crisis in since 1929 are full of CRAP. Totally full of crap. It is such a political stunt it is unbelievable. I feel very badly for those at Bear Stearns who were forced to hold the bulk of their savings in BSC Stock. But may Jimmy Cayne and Alan Schwartz be doomed to a life of Muni Golf (doubtful). Traders have massive incentive to pump up the risk, because if they win their rewards are MASSIVE and other than the feel of the kill they don’t “need” to do it again. How many $3.9 billion dollar paydays does John Paulson need to live comfortably for the rest of his life. God Bless him for that. Someone had to be short the insanity that took place in the real estate market the past 7 yrs.
Figuring the $3.9 B of personal earnings @ the current 15% cap gains rate…. That is $585 million in taxes that he is paying this year. That should cover the entitlements we pay former members of congress for about a year ( I don’t know the figure, but it is obscene). Many of the lawyer types that get a seat in congress are well compensated (presumably when they leave) by prestigious law firms or “buy” companys which pay them very handsome sums of money to influence policy. If we want to cut some government spending, I have an idea where to start…
Now, back to my original thought. We are not yet in the worst stint since the Great Depression We have dropped 18% in total value of the DOW from it’s all-time high watermark. However, with all the government intervention i.e. housing, Republican payolla (stimulus checks), and Fed intervention. We should head back to Dow 10,000 just by the Law of Attraction.
Now look at the above chart. We have had an AMAZING Bull run for the past 5 years. Dow 7,460 to 14,211. There SHOULD be a pullback, not massive intervention. And as if we only have eaten candy, coffee, and low nutrition (very, very low interest rates) for 5 yrs, it should take us a long time to recover. And now as we are trying to recover they “doctors” (PhDs) are giving us more stimulus. Perfect.
Now if we did find a way to pull all the way to our previous 14,211 highs, that would probably be the shorting opportunity of a lifetime. I would put 1% of my portfolio in some long term OTM put leaps and just wait.
Well that is all for now. I look forward to a great week. I would guess we see some upward movement (over exuberance) on Monday and perhaps the morning on Tuesday, then the fed announcement on Wednesday will be interesting. I say we finish the week lower than where we close on monday.
MONDAY TRADES: It was a very slow creep upward.
COF – bought 1 spread. Tester. June 50/45 for 1.20. Visa announces tonight. It should be a great quarter, as they just came public a month ago. A company pretty much comes out with great earnings EVERYTIME for the their first time., That should cause something to happen in COF. COF is up 20% in the past 3 days, and it is bumping against a previous double top.
IACI – Bought 4 units of Jun/July 20p calendar for .14. I have orders backing it up. Earnings announcement on Wednesday.
LOW – Bought 4 units of Jun/July 25p for .23. 4:1 reward to risk with 53 days until expiration.
BTE – June/Jan for .10. With negative mid-mark price is sure makes the trade look bad. the worst part about these trades is that it looks so bad on the bottom line upon entry.
I find it interesting now. Were as this time last year I would by tranches in 1,2,5 lots. I now trade in 5,10,20, and 50 lot sizes for each tranche. Pretty cool, although it does lead to loss of breath from time to time as I see more radical P/L swings. But as a percentage, it is still the same as last year. Very nice.
As the day closes I close EVEN. No P/L change. That is good when I can enter 3 sizeable positions without be hammered on day 1.
I close the day with
974 positive (non weighted) Deltas
340 Theta points
and 894 Vega points.
As I prepare for the week, I will look to 4 indices for ideas and guidance. And I have something to say