Which Way Wednesday – Topping Or Popping?


Phil’s Stock World

Goaaaaaaaaaaaaaaaaal!  When we first began following the Alpha 2 TradeBot pattern on Jan 3rd (see Stock World Weekly for current chart) back on Jan 3rd, I said: “Let’s assume we get that extra 2.5% between Friday’s close and expiration day – that’s going to take us to Dow 11,850 and S&P 1,285.” 

Yesterday the Dow hit our 11,850 mark, 2 days ahead of schedule!  If we break higher here (and the S&P is already at 1,295 – see David Fry’s chart) then we are “off the charts” and possibly running a whole new series – which is very possible as last year the IBanks didn’t have $25Bn worth of POMO a week to feed into their machines – that has to be worth something right?  At least 10 S&P points…

If, on the other hand, S&P 1,300 becomes a hard stop and the Dow can’t hold 11,850, let alone break up over 12,000 – then the second part of my prediction was that we would pull back to Dow 10,900 and S&P 1,188 – a test of the 200 day moving averages.  If we get that pullback and those levels hold, THEN we will be happy to get on the bullish bandwagon – we just want a test!  

Not, of course, that we are waiting around doing nothing.  We already had our “Secret Santa Inflation Hedges” and, at this point, you either have them or you shouldn’t even look as they are up well over 200% already and the market is “only” up 2.5% since then.  We were waiting patiently for Russell 800 to confirm our Breakout 2 levels and we not only got that but we got several nice tests since then so we’ll have to put that one in the “win” column as well for the bulls.  

While I don’t like chasing the MoMo stocks higher, AAPL and IBM show us that there are some solid fundamentals underlying the big boys and I mentioned in the Morning Post of the 6th that I did like CSCO ($20.77 at the time) and GLW ($18.98 that day) as solid, go-forward positions.  Even without our option plays, they are both up nicely in less than two weeks – certainly a higher percentage (5% for GLW, 2.5% for CSCO) than AMZN, which is up $3.50 (1.8%) or NFLX, which is up $6 (3.2%), who I cautioned to avoid in the same post.  Why would we want to commit $195 to NFLX when we can buy 10 diversified blue chips for around $20 like GLW and CSCO and it’s very doubtful that they will fall victim to a dip the way fellow MoMo play CREE did last night on a relatively small miss?  

This is about RISK MANAGEMENT folks – a concept that investors seem to have thrown out the window lately.  Why should we play the high-flyers when we can make relatively small capital commitments to leveraged trades that will leave the MoMo stocks in the dust?  For instance, in that same post of the 6th, we discussed the progress of our Breakout defence Plays and one was the FAS Apr $20/25 bull call spread at $2.70, selling the Apr $21 puts for $2.55 for net .15 on the $5 spread.  At the time the spread was netting $3.05 (up 2,033%) and today it’s at net $3.50 – that’s up another 15% in two weeks, even if you were that late to the party.  $3.50 is up 2,233% and the trade still looks in no particular danger of failing its $4.85 profit goal.  

So screw those MoMo stocks – if they keep going up, we have 100 other ways to make many multiples of their gains without making all or nothing bets on their earnings.  Of course, even 15% is nothing compared to the naked FAS April $27 calls that we picked up for $1 a while ago and were “only” up 55% on the 6th.  It’s been a good few weeks for FAS, who are up to $31 now and those April $27 calls are now $5.85, up a nice 485% from our entry but even up 277% in two weeks for the late-comers (and we got a really nice-reentry on the 7th).  NFLX who?  AMZN what?  

This is why I never understand the excitement about following these silly Cramer-type stocks.  If things are so gung-ho fantastic that people are willing to pay p/e’s of 75-100 for high-risk stocks, then surely we can make small bets that the financial sector will rise or the price of crops will continue to creep up.  In fact, DBC was another play we discussed that day (these were free trade ideas, right in the morning post for millions of people to see) and our play there was the Jan 2012 $26/30 bull call spread at $1.40, selling the 2012 Jan $22 puts for $1.10 for net .30 on the $4 spread.  At the time the spread was up to .85 and up 183% but that was out of a potential 1,233% max gain so the train had hardly left the station on that one.  Today DBC is at $28 and the $26/30 spread is up to $1.80 while the puts have fallen to .65 for $1.15, now up another 100% at 283% just two weeks later.  Or you can buy NFLX and make 3.2%, biting your nails every day and tossing and turning every night.  Do I really need to give you any more examples?  

Of course we don’t clear 283% because we hedge.  Our short-term hedges are getting killed but that’s fine as it means our long-term spreads, which are the majority of our cash in play – are doing very well.  When that changes and the market drops – we will get a sharp pop from our short-term hedges (see this weekend’s review of our $10,000 Portfolio for a good idea of how that works) which balances out the loss of our longer-term positions, which allows us to calmly decide if it’s time to take them off the table or ride out the pullback.  Whenever we do get a pullback, like we did on the 7th, the cash profits from our short-term hedges can be used to initiate another play.  On the 7th we discussed the long-term pair trade of selling the AAPL 2013 $175 puts for $8 and buying 2 SPY 2012 $125/135 bull call spreads for net $1.60 on the potential $20 play (if the S&P finishes above 1,350 in Jan 2012).  

The AAPL 2013 $175 puts were already down to $5.90 yesterday and the SPY spreads were each $5.35 for net $4.80 already – up 200%!  What was our bet there? That AAPL would not fall all the way to $175 and that the S&P would go higher. This is not rocket science folks – this is what we are trying to teach over at PSW!  The margin on the short AAPL puts was net $1,600 for a contract and the spread was another $960 so, rather than buy $2,560 worth of NFLX (13 shares), you could buy a single spread like this and that spread is now up $360 while the 13 shares of NFLX are up $78.  

Now, which is more likely to happen?  Will AAPL drop below $175, forcing you to buy the stock, or will NFLX drop 10% and cost you $250?  Our spread outgains the MoMo stock almost 5 to 1 on the same cash + margin commitment – we do NOT need these stocks to make money.  Please don’t let yourself get sucked into them – especially here at a critical inflection point for the market!  

We don’t have to BELIEVE in the rally to make money on it.  If we’re watching a 3-Card Monty scam and you can see that the the suckers NEVER find the queen (not when there’s real money on the table) – then why should we not bet against the suckers?  Look – we don’t MAKE them play.  In fact, I spend a great deal of time and effort trying to explain to people how the game is rigged but, if they are going to keep playing, we may as well make a few side bets, right?  The trick (as demonstrated in the video) is to know when to fold up the game and walks away.  Holding our Breakout 2 levels through next week will indicate the game isn’t over yet but we do know enough to keep our eyes out for any sign of trouble – even while we’re enjoying the game.  

The 7th marked the end of our Q1 promotional week, where we give away free trade ideas in the morning posts (don’t worry, we’ll do it again in April!) but that’s nothing compared to what we do in Member Chat every day with our trade ideas.  Monday, the 10th, for example, in Member Chat it was the DIA Jan $116 calls for $1 (now $2.35, up 135%) at 9:48, SKX short Apr $20 puts at $1.90 (now $1.25, up 35%) at 9:58, short DIA Jan $115.75 puts at $1.15 (now .10, up 91%) at 10:15, the DIA Jan $116 calls again at 10:16 (I REALLY liked them), NFLX Jan $190 short calls at $4 (after a roll, now $5, down 25%) at 10:44), BIDU Weekly $100 puts at .40 (total loss, 100% if not stopped out) at 10:53 and QID Jan $10 calls at .94, at 3:47, which we rolled along to Feb $10s for .15 more (see $10K Portfolio review) and doubled down, now .70 so down 35% so far.

That’s how we’re playing the markets at the moment – a little bit bullish and a little bit bearish – we’re not too proud to be wishy washy since taking our short-term profits on both sides when the market gyrates can lead to some very nice average gains while we wait for our longer-term, hedged ideas to play out.  As I lectured in this weekend’s educational post – why would you want to be 100% bullish or 100% bearish in this crazy market when you can make money on both sides of the aisle.  Again, compare these nice little trades that make a quick 20-100% here and there to sitting on NFLX at $195 a share and hoping it goes to $250 some day.  Frankly, I don’t even know why anyone would

AAPL had blow-out numbers last night so good call by Cramer not to lose faith but I still think $350 is plenty to get out of the stock.  This week, I’ve been giving Members some ideas on how to get out of AAPL stock and swap into option strategies that let them participate in a move from $350 to $450 without the downside risk if AAPL falls back to $300.  That’s hedging – it’s what you should do when you have a huge winner like AAPL (or NFLX or AMZN or PCLN for that matter).  The higher the market goes without a correction, the more nervous we get that the correction will come.  As noted in David’s S&P chart – up 20% on less than 1/2 of normal volume means you are going to have a very hard time finding buyers on the way down. 

But, will there ever be a down?  That is the question, of course.  We did the big macro overview thing this weekend and we’re in a watch and wait mode this week as we watch our Alpha 2 pattern play out.  It didn’t matter that Steve Jobs got sick yesterday so why should it matter that AAPL did great today?  On that logic we took a spread on AAPL, expecting them to stay in range and that trade is looking very solid at the moment.  Today, GS is a little disappointing but so what?  Pimco’s Kashkari says the US faces a debt crisis without drastic spending cuts – yawn!  Housing starts fell 4.3% in December to fresh 20-year lows but nobody cares.  ICSC Retail Sales were off 0.1% last week but that’s an improvement from last week’s 3.2% drop although the year/year number is now just 1.4%, when it was celebrated at 3.5% last week.  This is the worst rate since last May but it doesn’t fit the MSM narrative so I doubt anyone else will bother you with it today. 

Other than that, it’s a slow news day.  Assuming, of course, you don’t give a damn about violent global food riots that are threatening to topple governments around the World.  I guess we also shouldn’t care that budget cuts are forcing Camden, NJ to cut 1/2 of it’s police force and 1/3 of its firefighters – a heck of a plan for the city that already has America’s highest crime rate!  Well, that is, as we like to say “Somebody Else’s Problem” and is not reason not to BUYBUYBUY is it?

Still, if you do have the time,  The Economic Collapse Blog has a great article on “Austerity in America” – just something you may want to consider before you let it all ride on what are becoming some very crowded trades!  

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