Non-Farm Friday -- Is America Working?

What a crazy start to 2016!  

Of course, it is no crazier than the 3rd quarter of 2015 so far, when we had our August crash followed by a slow September bounce that led into a mega-rally that closed our year off back at the highs.  At the moment, we are playing with the premise that it's the highs that were wrong - NOT our current 1,900 level on the S&P.  We're not expecting any big rally here - just consolidation

This is nothing new, of course.  Back on December, 2nd, in: "Which Way Wednesday – S&P 2,100 Yet Again," I noted:

The S&P gets to 2,100 and we short /ES Futures at 2,100 (with tight stops above the line) and Russell (/TF) Futures below the 1,200 line and Nikkei (/NKD) Futures below the 20,000 line and then, tomorrow or Friday, I'll tell you how much money we made shorting and you'll say "why do I never catch these great trade ideas" and I'll say it's because you're not patient enough to wait for the pattern to reset itself and just make the obvious play.  

This is the 11th time the S&P has been over 2,100 since May and, so far, it's been like a little money machine for us all year long on the short side.  I know this time may be different and the last 10 times may have been different too, which is why we stop out if we don't get confirmation from the other indexes that things are toppy but, when it works – it's good for $250, $500, $1,000+ PER CONTRACT in the Futures at $50 per point to the downside. 

By the way, I know we've been talking a lot about the Futures lately and that's because our portfolios are mainly in CASH!!!  That means we have plenty on the sidelines to play with and the quick in and out entries on the Futures (with much lower friction costs than day-trading stocks or options) are a good way to amuse ourselves while we wait for buying opportunities.  In fact, those 2,100 short on /ES are up $10,000 PER CONTRACT at S&P 1,900 and the Russell shorts are up $8,000 per contract and the Nikkei shorts are up $16,250 per contract and this is the part where you say: "why do I never catch these great trade ideas?

You will always get these great trade ideas if you SUBSCRIBE HERE and don't forget, we're long now as we called a bottom on the S&P at 1,850 and now our stop would be 1,900 to lock in a $2,500 per contract gain on the bounce.  

We have done plenty of bottom-fishing in the past month.  We've sent out 8 Top Trade Alerts in the first 5 weeks of the year including, fortunately, two disaster hedges on January 8th that are still sort of playable, so let's review those into the weekend's uncertainty.  HOPEFULLY we'll get back over 1,950 (strong bounce) on the S&P with some strength and we won't need them but - if the day goes poorly - we'll need some more hedges into the weekend:

  • Buy 50 S&P Ultra-Short (SDS) March $22 ($1.70)/$27 (0.70) bull call spread at $1 ($5,000) 
  • Sell 5 Apple (AAPL) 2018 $80 puts for $9 ($4,500) 

Though SDS is only at $22.29, the March $22 calls have held $1.40 while the short $27 calls have fallen to $0.37 so the net of the spread is still over $1 and the short AAPL 2018 $80 puts are still $9 so free insurance so far.  The March contracts only have 42 days to expiration BUT, if the S&P doesn't fall back below 1,850 over the next 30 - we're probably not going to need the hedge.  We will, of course, roll the March $22s before they go below $1 to preserve our investment. 

On the whole, I'm more worried about the Nasdaq falling apart - especially with LinkedIn's (LNKD) tumble last night and seeing how fast Alphabet/Google (GOOGL) gave up it's gains this week.  Our Top Trade hedge on the Nasdaq was:

  • Buy 50 Nasdaq Ultra-Short (SQQQ) March $23 ($2.75)/28 ($1.45) bull call spreads for $1.30 ($6,500)
  • Sell 7 Apple (AAPL) 2018 $80 puts for $9 ($6,300) 

As above, the short AAPL puts are still $9 (and we still love them as a bullish offset, where our worst case is owning AAPL at $80) but SQQQ is at $23.88 and the March $23 calls are $2.95 while the short $28 puts are $1.35 so net $1.60 is up 0.30 (23%) so far.   Of course, keep in mind that, if this trade triggers and SQQQ goes to $28 on a 7% drop in the Nasdaq (it's a 3x inverse ETF), that the spread pays $25,000 on the $200 cash investment for a return of some ridiculous percentage - so put 23% in context...

On the long side, our Top Trade Alerts for 2016 have featured trade ideas on Apple (AAPL), Chipotle (CMG) - and yes, we caught the dead bottom on Jan 6th, (IMAX), (IBM), Gilead (GILD), Disney (DIS) - another dead bottom on 1/20 AND 1/26 - that's how much we liked them down there, AAPL yet again on the 28th (dead bottom that time), Barrick Gold (ABX), Russell Futures at 1,000 (stopped out +$2,000 per contract already) and Boeing (BA) - a dead bottom call on the 2nd of this month.  

The ABX and Russell Futures trade ideas were from our Jan 29th Top Trade Alert, which went out (text and Email) to our Members at 9:58 am.  ABX has really popped on this gold recovery (GLD is another play for our other portfolios) and our trade idea was:

As a new play on ABX, I'd sell the 2018 $10 puts for $3 and buy 2x of the $7 ($4)/$12 ($2.20) bull call spreads for $1.80 so net 0.60 on $10 worth of spreads that are $5.20 in the money to start.  

Already, after just one week, this spread is mainly in the money and the 2018 $10 puts have fallen back to $2.50 while the $7/12 bull call spread is now $2.40 x 2 = $4.80 so net $2.30 from the 0.60 entry is up 283% on cash in just 7 days!  This is a very important example of what we often tell our Members:  You don't have to take big risks to get big returns.  This was a very conservative play with ABX trading at $9.50 that morning and our worst-case scenario was ending up with the stock at net $10.60 in 2018.  

Since we were very confident gold would be going over $10, we used our willingness to own ABX to leverage the upside using the bull call spreads.  ABX closed at $11.18 yesterday, up $1.68 (17%) from $9.50 yet the spread we came up with only risked overpaying by $1.10 (11.5%) yet, because we were right, is already giving us a 283% return on our cash outlay!   That's what hedging with options is all about!  

In our Options Opportunity Portfolio, we have made many of the same trades as our Top Trade Alerts (ones that are appropriate for our model $100,000 portfolio) and we've gained 25% ($25,000) in the last two weeks as we're experiencing the same gains as our Top Traders.  While sitting on about the same $128,000 in CASH!!! (have I mentioned how much we love CASH!!! lately?), the value of our open position has risen from $71,502 to $96.088 - not bad for two week's work!

8:30 Update:  Waiting on the Non-Farm Payroll report and expecting to be disappointed from the 190,000 jobs expected due to last month's storm.  Even if the number is good - so many companies have announced layoffs this Q that I can't see how February or March will give us good numbers.  The question is - will bad news be good news for the markets or has sentiment shifted and bad news is now bad news?  

151,000!  Ouch - a huge miss.  Nonetheless, Unemployment FELL to 4.9%, the lowest level since 2007 and that actually ticks off the Fed's check box for "Full Employment" and maybe too full, judging from lower productivity numbers and the wage pressures reflected in recent earnings reports.  December jobs were also revised down by 30,000 so January is a huge miss in terms of number of jobs created - only net 120,000 since the last report.  

I can't see how anyone can spin this to be good news - even if it does keep the Fed in the game.  Looks like we will be needing those hedges and that means I need to go to work back in our Live Member Chat Room.

For those of you who can play the Futures - S&P (/ES) can be shorted at the 1,900 line for pre-market protection with tight stops. 

Have a great weekend, 

- Phil