Tumblin' Tuesday -- Back to Bouncing (We Hope!)

Well that was obvious. 

As I noted in yesterday's morning post, yesterday's light-volume rally was nothing but a paint job to con the suckers back into the market and the dips that fell for the scam have already been parted with their money this morning as the indexes are down 1.5% already, now down 5% from Thursday's highs.

This is why we have our 5% Rule™ over at PSW - it keeps us from falling for this BS.  Rather than looking at the squiggly lines as they move up and down, we prefer to focus on the FUNDAMENTALS and we only change our price targets when the Fundamentals actually change, not day to day based on the previous day's price action - that would be kind of stupid, right?  

Sure we watch the technicals because about 80% of the market trades on technical signals.  If the market traded based on phases of the moon, we'd watch that too because the fact that people follow it becomes A (one) Fundamental factor but never THE Fundamental factor.  Because we watch the movement of the masses from the outside - it's very easy for us to predict which way the herd will stampede but please - don't confuse our analysis of voodoo for our endorsement of it!  

In the morning post, I said the S&P needed to bounce to 1,970 to impress us and, as you can see from the chart, that's right where it got rejected in the morning and now we're back at the lows.  Rather than shorting the index in our Live Member Chat Room as it topped out, we looked at a bear call spread on Amazon (AMZN) buying the Jan $600 puts for $73.50 and selling the Jan $500 puts for $23 for net $50.50 on the $100 spread.  If AMZN is below $500 at Jan expiration (15th), the spread makes $49.50 (98%).

Of course we already have our disaster hedges (see last Thursday's notes), so this was a more aggressive bet where we put our foot down on Amazon's ridiculous $250Bn market cap on less than $100Bn in sales and no profits at all (and this is year 21, not year 2!).  One of our Members (Enfilade), asked if we had any specific bearish bets and that one was the top of my list.  

If you don't have any disaster hedges, I would suggest you strongly consider them or, of course, there's always CASH!!!, which is the preferred investment at PSW currently.  Our cash did very well yesterday, with our US Dollars completing a 2% up move off of Friday's lows.  Unfortunately, the average investor doesn't understand that cash is an asset class and they feel they NEED to invest in something all the time - it's a huge mistake and one your "Financial Advisors" are in no hurry to correct because cash doesn't generate any fees for them.  

Just because we're in cash doesn't mean we can't make money.  As noted in "How to Buy a Stock for a 15-20% Discount" we can leave the cash in our portfolio and use the margin to promise to buy stocks for a steeply discounted price AND GET PAID FOR IT!  In the video, our example was AT&T (T), where we sold the Jan 2015 $30 put for $2 in June of 2014.  T did, indeed finish over $30 so the short puts expired worthless and we kept the $2, which was a 6.7% return on the $30 cash over 7 months (1% per month) - much better than sticking it in the bank (or under the mattress).  

T is currently at $32.50 (as usual) and we can sell April $32 puts for $2.  That's $2 we collect up front in exchange for promising to buy AT&T for $32 in April.  If T is under $32, we'll have to buy it (assuming we don't adjust) and we'll net into the stock for $30 - a 7.6% discount and, if not, we once again collect 7% in 7 months against part of our cash pile.  

We'll discuss this strategy in more detail in today's Live Trading Webinar at 1pm, EST.  Last time we did a free one it filled up fast so register early if you are going to attend.  

In last week's Webinar (replay here), we were shorting the S&P (/ES Futures) at 1,965 and now, at 1,925, those contracts are up $2,000 each for the week.  Of course, we don't just ride them out like that but getting the general direction right can be VERY PROFITABLE.  As I'm writing this, Europe in in free-fall, dropping 3% across the board so our open is likely to be very painful for those who don't have hedges (or cash).  

As I've noted over and over again - it's very difficult to fix your portfolio after the fact - which is why you need to learn to hedge your positions properly.  As we discussed last week, the Futures are a fantastic tool to rebalance your portfolio on the fly but nothing beats a good old-fashioned index hedge, like the weekend hedge we added to our Options Opportunities Portfolio on Friday.  

It was a very easy fill, especially with yesterday's pump job and our SQQQ bull call spread closed yesterday at $2,200, up 5% while our short AAPL puts were up $150 (12.5%) and the combined spread went from net $900 to net $1,330, which is up $430 (47%), which is perfect for protecting our mainly cash portfolio and the upside is $7,100 - so plenty of room to run as the Nasdaq goes lower (see yesterday's post for why it will).  

One simple hedge like that shifted our Option Opportunities Portfolio to neutral, which is fine as we're locking in a 10.1% gain in just week 7 of trading - when you are that far ahead you NEED to protect your gains - BALANCE is the key to building a portfolio if you want to make consistent gains over time and get off the stock market roller coaster.

 Meanwhile, our bounce lines for the major indexes are same as they ever were (governed by our fabulous 5% Rule™ and our Big Chart™) so we're still looking at:

  • Dow 16,200 (weak) and 16,650 (strong) 
  • S&P 1,900 (weak) and 1,950 (strong) 
  • Nasdaq 4,550 (weak) and 4,700 (strong)
  • NYSE 10,050 (weak) and 10,300 (strong)
  • Russell 1,130 (weak) and 1,160 (strong). 

Those colors are based on the pre-market action - it should be around where we open.  If Nasdaq 4,700 snaps - look out below as the NYSE is already heading deep into negative territory (10,450 is already 5% below our Must Hold line) and the Dow doesn't have far to go before it to is down 10% at 15,840.  

As I noted yesterday, we have a nasty Durable Goods report coming on Thursday and yesterday's Existing Home Sales were down 4.8% with just 5.3M homes being sold this year.   That's out of 110M US homes and that means people are, on the average, stuck in the same house for 20 years.  Why?  Total lack of upward mobility in today's economy, that's why (see "Trickle Down Mythology Exposed").

Still hope springs eternal as Draghi speaks tomorrow at 9am and Yellen speaks Thursday at 5pm so the worse things look today the more likely it is they go doveish tomorrow - and round and round we go!  Have I mentioned how much I like CASH!!! recently?