Testy Tuesday – Are Markets Topping Or Popping?

Copper hit a new all-time high in Shanghai this morning (as the guy who owns 90% of London’s closed for the holiday exchange supplies sold it to himself for more money than he did yesterday) and gold is back at $1,400 in the futures.

That should give us a better entry on FCX puts than we expected for round 2, but Paul Krugman has me worried now that maybe commodity prices are just high because the World hasn’t got enough of them to go around.

I think Paul may be discounting the effect of a 10% decline in the dollar a little too much – which is understandable as he is still arguing for more stimulus while I’m arguing that the way they are stimulating now is causing this problem and can not and should not be sustained.  

Still, we have to be pragmatic. That’s why, this weekend, I posted our “Secret Santa Inflation Hedges for 2011” as a follow-on to the “Breakout defence – 5,000% in 5 Trades or Less” ideas of the 11th and, in the week between the two, we had bullish bets on HMY, XLF, CAKE, TNA, IWM, CCJ, CHK, EXC, TNA, XLF, UNG, GLD, AAPL, GLW, TOT and AXP – which I had mentioned on the 19th in the weekend post “It’s Never too Early to Predict the Future.”  Just because I think there’s going to be a disaster doesn’t mean we can’t go with the flow while we wait, right?  

We don’t have to like the market to buy it above our breakout lines but we do need to keep in mind that this is a very thin rally that is very likely nothing but window dressing aimed at dragging money off the sidelines so the IBanks who have been propping up the markets can, once again, stick the retail shareholders with the bag as they load up on puts (watch the VIX to confirm) and crash the markets once again. I’ve seen it happen in 1999, I saw it happen in 2008 and, both times, the rally lasted longer than seemed logical but the smart play was to hit and run – not to leave your money on the table but to participate in the upswings and then get out.  

Yesterday, for example, we grabbed the QQQQ Weekly $53 calls at $1.38 in the morning and ditched them at $1.85 in the afternoon.  That’s 35% on a day trade and made a nice cover for our bearish bets so we didn’t get forced out of them on the pop.  Today we will do the same because these low-volume rallies don’t impress us, even if they have gotten Paul Krugman to capitulate on commodities!  

Our breakout levels give us very clear indicators as to where to kill the bullish side of our bets.  As our aggressive, 5,000% suggestions are complex spreads – timing is everything.   Those were for Members only and still in progress but back on Dec 3rd, I had put a couple of similar ideas right in the morning post.  One was the FAS April $20/25 bull call spread at $2.70, selling the Apr $21 puts for $2.55 for a net .15 entry on the $5 spread.  The $20/25 spread is already $3.50 and the Apr $21 puts have fallen to $1.23 for a nice net $2.27 on the spread, up 1,433% on cash in less than a month.  Figure margin on the $21 puts to be $10.50 plus the .15 cash and it’s still a nice 21% ROI in less than 30 days – THAT’s the way to fight inflation!

The max gain on this trade is $4.85 so still a lot of cash to capture and we are feeling good about XLF (it was my “guaranteed” trade of the year in the Secret Santa post), which means we are not inclined to kill the trade at less than 50% of potential but that doesn’t mean we don’t set a stop on the net at about $2 to lock in the gains.  

The other trade idea from the post on the 3rd was for DBC.  There were a couple of ideas here – the first was simply buying the April $27 calls for $1.  Nothing fancy there, just buy a call and wait for inflation to kick in.  Those calls are $1.30 and were $1.35 Friday so $1.25 stop locks in a 25% gain – also not a bad month for most people’s portfolios, right?  The spread play was the Jan 2012 $26/30 bull call spread at $1.40 and you can just take that by itself as well as it has a potential 185% upside – enough to keep you ahead of the game.  That spread is still playable at just $1.55 (up 11%) while the $22 puts we looked at selling for $1.10 to make it a net .30 trade are now .75 and up .35 (32%) so that’s net .80 on that .30 cash commitment on that trade or 266% cash back in less than 30 days.  

These are fun trades, we find them all the time and you don’t need to put a lot into them to make a lot.  They are especially useful when you have cash on the side (like we do because we think this house of cards is going down and we will be happy to deploy our cash in the wreckage, a la Buffett) and margin is not an issue and, as you can see, you don’t have to ride them out to the end to have a very good short-term trade while you wait for a little market clarity. 

We are still trying to stay on top of things with our $10K to $50K Portfolio but we are stuck dead at $26,000 (virtual net) with 4 bearish positions remaining open.  Our deadline for $50K was Jan 21st and it’s not looking good at the moment as this market simply goes up and up every day but I still have the nagging feeling that, the minute we capitulate, we’ll miss a beeline to $50K so it looks like we’ll stick it out over the weekend, although it’s only Tuesday so it may be too early to put on a brave face on bearish bets that clearly are not working at the moment.  

It does seem to me that what’s going on with copper is a microcosm for what’s going on in the markets.  The trading is very thin, the Chinese markets are selling off with the Shanghai down another 1.7% this morning and the Hang Seng off 1% as well.  Nonetheless, with London closed and no real price check on the market, copper shot up a nickel to touch $4.31 overnight as the Dollar was knocked down from 80.7 to 78.9 – which used to be considered a major move in a currency but is now considered “Tuesday morning.”  It is truly amazing what you can get used to

Somali Pirates (aka “Rent-A-Rebel“) have seized an fuel tanker, also aiming to drive up oil prices during a thinly traded week (are you seeing a theme here?).  Already the return of $3 gas prices has knocked 20% off the value of used SUVs in just one month, but I sure don’t feel sorry for the people who still have them – I was dumbfounded at how many SUVs were selling this year as truly my 6 month-old niece has more of an attention span than the American consumer, who can be burned over and over and over again by the same bad decisions, it seems.  “It’s a challenge,” says Adam Lee, president of the family-run Lee Auto Malls dealerships in Maine. “How do you tell a good customer, ‘You paid $32,000, and now it’s only worth $17,000?’”  ROFL!!! 

Of course, I guess you could say the same about “good customers” who keep buying CMG, NFLX, AMZN and PCLN, who expect a good ride but will much more likely end up in a horrible crash.  At $120, we can add FCX to our list of favourites as I don’t see them holding the dollar below 80 once Europe rolls into the New Year and is forced to deal with their issues again.   

Getting back to retail shoppers – MasterCard’s SpendingPulse survey shows a 5.5% increase in retail spending for the 50 days before Christmas this year.  Total Retail Sales were $584.3Bn, now beating 2007′s record $566.3Bn after a 6% dip in 2008 and a 4% bounce last year.  These are blow-out numbers led by top 10% favourites like clothing (up 11.2%), Jewelry (up 8.4%) and Luxury Goods (up 6.7%) and even home furniture put in a positive month for the first time since August.  

For the past year or two, when I’ve seen growth in one area, it seems to come at the expense of another,” said Michael McNamara, vice president for research and analysis at SpendingPulse. “Here, things are actually all moving in the right direction.”  Of course, the broad increase was driven in part by higher spending on necessities like gas and food. And even with the across-the-board gains, some categories, like furniture and electronics, have still not climbed back to their prerecession levels.  “In the face of 10 per cent unemployment and persistent housing woes, the American consumer has single-handedly picked himself off the mat, brushed his troubles off and strapped the U.S. economy on his back,” Craig R. Johnson, the president of the consulting firm Customer Growth Partners, wrote in an e-mail.

I like SKS ($10.92) as the laggard in that space.  You can buy the stock and sell the 2013 $10 puts and calls for $4.65 for a net $6.27 entry and, if below $10 and another round is put to you, the average entry is $8.14, a nice 25% discount off the current price (see How to Buy Stocks for a 15-20% Discount for details on this strategy, which is one of our favourites).  

The ICSC Retail Store Sales were not so bullish, up just 1% but the Redbook Chain Store Sales had a very strong 4.6% gain over last year which simply indicates that sales are moving out of the retail stores and onto the Web at a very rapid clip.  That’s right – even more unemployment as Big Box retailers are able to sell more stuff and use less people!  Of course, we don’t know if anyone is actually making profits on all these sales but we’re not going to bet against it at this point – clearly the tide is turning bullish on the data front.  

I still fail to see where the money is coming from.  I mentioned to Members yesterday that perhaps the deleveraged consumers are simply re-leveraging for the holidays and we’ll be right back to tightness in January as people are stunned by their MasterCard bills – especially if it’s combined with rising grocery prices and $50 tanks of gas again.  Home prices continue to fall off a cliff as Case-Shiller tells us we fell another 0.8% in October after falling 0.7% in September and this was NOTHING like the +0.1% expected by analysts who aren’t paying attention to reality.  

Keep in mind we’re doing all this with record low interest rates.  What happens if our TBTs (as I said yesterday, a buy at $37.50) head back over $40 in January and those credit-card interest rates start climbing on unpaid balances?  The average US household has $8,000 in credit card debt and that number peaks out over $10,000 in January.  Of course, why should consumers restrain themselves when the government grew their debt 22.7% last year – adding a $25,299 debt burden on every single citizen?  If the government is going to drop $100,000 worth of debt on my family this year – the least I can do is get myself a new TV, right?  

I am TRYING, really I am, to get more bullish.  So far, it’s a slow process but, if we break out to new highs today and hold them – what else can we do but go with the flow?  

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.