TGIF - Stop the Week Before Things Turn Ugly!

Wow, what a day!  

Now aren't you glad we added those hedges on Tuesday?  Keep in mind that I can only tell you what the market is going to do and how to profit from it - the rest is up to you...  Our trade idea from Tuesday morning's post was:

  • Buy 40 June SQQQ $17 calls for $2 ($8,000) 
  • Sell 40 June SQQQ $21 calls for 0.85 ($3,400) 
  • Sell 5 AAPL 2018 $85 puts for $7 ($3,500) 

The idea is we REALLY want to own 500 shares of AAPL at $85, so the $3,500 we collected for selling the puts is free money and AAPL only fell to $95 anyway, so we're feeling very good about our 2018 obligation.  Meanwhile, the Nasdaq Ultra-Short (SQQQ) June $17 calls are already $3.10 ($12,400) while the short June $21 calls are $1.15 ($4,600) so we could close that spread now for $7,800 off our $700 cash outlay on Monday and that's a gain of $7,100 (1,014%) in 4 days - you are very welcome indeed and THAT is how we hedge!  

That then leaves us with just the obligation to buy 500 shares of AAPL at $85 in Jan, 2018 if it is below $85.  The current ordinary margin on 5 short puts is $4,225 according to Think or Swim or we could buy them back for $9.80 ($4,900) and then we'd be cleanly out of the entire trade with a $2,200 gain (314%) in 5 days.  

Our portfolios, on the whole, took very little damage on the dip (so far), and keep in mind the upside on the SQQQ spread is $16,000 - so still good protection in case things don't improve (and we have other hedges that are already in place, of course, the SQQQs were specifically to protect us from the poor Apple (AAPL) earnings we expected.  Meanwhile, as we did expect these numbers from AAPL, we're buying more on this dip (see yesterday's Top Trade Alert).    

Trading is all about balance.  Because we had the heavy short position and we thought the markets would bounce yesterday before heading lower, in our pre-market Alert to Members yesterday morning (which I also tweeted), reiterating our plan from Wednesday Live Trading Webinar (replay available here).  Because we already had plenty of short positions that we couldn't cash in on the pre-market dip, it made sense to play the Futures for a bounce to lock in the profits on our bearish spreads.  My 5:16 am comment in Live Member Chat was:

As we expected, the BOJ did not save the World and /NKD dropped from 17,600 to 16,400 – too bad we didn't have the balls to play that one!  I'm kind of liking /NKDlong here (16,400) for the bounce as the Dollar is bottoming at 93.50 and the Yen is topping at 92.50, which is already over the 2.5% line.  
The same can be said for Dow (/YM) 17,800, S&P (/ES 2,070), Nasdaq (/NQ) 4,400 and Russell (/TF) 1,140 – we can play these lines bullish (long the laggards) with tight stops below and 3 of 5 must be over to play the slower 2 and out if any 3 of 5 are under – simple rules.  Watch EuroStoxx 3,000 as well – if that fails (I'm fairly sure we bounce first), then the markets all fail with it.  

We have GDP at 8:30 with low expectations but be very careful – for now, we're just playing for the early morning bounce off 3,000 in the EU..

And no, the 5% Rule™ is NOT TA, it's just math!  We use the charts to illustrate it but, for many years, I simply used to post spreadsheets for our Members so we knew what the market was likely to do at any given time.  

The Nikkei topped out at 16,650 for a $1,250 per contract gain, the Dow hit 17,950 for a $750 per contract gain, the S&P hit 2,085 for a $750 per contract gain, the Nasdaq hit 4,440 for an $800 per contract gain and the Russell, as usual, was our star performer (it's very volatile), topping out at 1,153 for a $1,300 per contract gain.  

And then the whole thing collapsed!  As I warned our Members at 10:42:

 GDP wasn't so bad and the Dollar is low (94) and the Fed is easy so they are able to float the markets back up again while the Institutions bail and leave all the retailers holding the bag.

Apparently, my warning caused Carl Icahan to dump his Apple (AAPL) shares and the whole market quickly followed Apple down in the afternoon, causing us to BUYBUYBUY on that dip (below $95).  Apple is simply suffering through the Global slowdown - as any company that dominates the market will do when the overall economy slows down but, for some reason, no one is willing to give AAPL the benefit of the doubt.  Though 75% of the companies reporting so far (about 40%) have beat ultra-low expectations on earnings, a stunning 56% are missing on top-line revenues anyway:

In reality, with 209 S&P 500 companies reporting so far (and we're waiting on the oil company disaster), earnings are down 5.5% from Q1 2015 and down 1.6% on revenues and guidance for Q2 is a modest improvements at best though, further out, most are expecting things to improve into 2017 (and we do too - it's the summer we're worried about).    

There's an old saying that goes, "If it wasn't for bad luck, I'd have no luck at all" - one many traders who don't balance and hedge are sadly familiar with!  With corporations, the saying should be "If it wasn't for buybacks, I'd have no earnings at all" and you can see why on this chart as a 4.3% reduction in share count is the only thing keeping earnings from being negative this quarter.  

As to the GDP, we didn't see anything encouraging over there and neither does the Consumer Metrics Institute (via Dave Fry), who said:

-- The growth rate for consumer spending took another significant hit, dropping substantially for the third consecutive quarter. In fact, the growth rate for consumer spending on goods was barely positive, at a miserable +0.03%. And non-discretionary spending on health care and housing provided most of the remaining growth in consumer services spending.

-- Private investment contracted for the first time since the first quarter of 2011.

-- Exports went deeper into the red.

Looking at the past three quarters as a group, we can see a slow-motion slide into either stagnation or contraction. It is truly sad when stagnation looks to be the better alternative.

That sums it up pretty nicely, doesn't it.  Well, I'm tired of warning you to be careful so do what you want to and have a great weekend, 

- Phil