Will We Hold It Wednesday: S&P 2,000 Edition (Again)

Well, we've seen this movie before.  

I'd say "I told you so" but that's getting boring and, after all, the headline for yesterday's post was "China’s 20.4% Import Collapse Has Us Testing S&P 2,000 Again" so it's not like it was a subtle prediction.  Last Friday, despite the rally it was "Earnings Iceberg Dead Ahead" and, like the guy who said the same thing on the Titanic - nobody likes to listen to the guy with bad news, do you?  

Ever Cramer has finally come out of his buying stupor and is telling his sheeple to cash out and get to the sidelines.  Of course, if Cramer is on my side of the table, I have to question my premise as I called this top 2 months and 5% ago while he was still foaming at the mouth and telling people to BUYBUYBUY at 2,100+.  I'm the guy that Cramer warned you was "spooking people out of stocks too soon" but it's a hell of a lot easier to get to cash while the market is going up than after it's already pulled back and your portfolio has taken damage.

It's also a lot easier to hedge when the market is high - as the hedges are a lot cheaper then.  Cramer's newfound selling premise is based on the McClellan Oscillator, which I had pointed out last week was way overbought and remains so BUT it's significantly improved from last week on a fairly minor overall pullback and that's actually a bullish signal - if the indexes confirm by holding our bounce lines.  

Back on 8/26, we predicted the indexes would bounce from their 2015 lows (8/24 was the big crash) to the following levels, based on our fabulous 5% Rule™:

  • 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).  

We were well below them all on that day but now almost fully recovered - waiting for the NYSE (10,262) and the Russell (1,147) to confirm the recovery and that's why, in yesterday's Live Trading Webinar, we chose the Russell futures (/TF) as a long play at 1,140.  We need to watch the Russell and the NYSE very closely today - if they don't break over, then Cramer is right and we should be getting more bearish.  

Meanwhile, my featured trade ideas from that 8/26 post was a long on Apple (AAPL) and a long on Baker Hughes (BHI) (see original post for logic and details):

  • Buy 20 AAPL 2017 $80 calls at $31.50 ($63,000 outlay) 
  • Sell 20 AAPL 2017 $110 calls for $15.60 ($31,200 credit) 
  • Sell 20 AAPL 2017 $75 puts for $7 ($14,000 credit) 

As you can see, AAPL is only up a bit from $107 that morning, but the panic has washed out of the spread prices and because we teach our Members to "Be the House - NOT the Gambler" and we sell premium, the net of the $17,800 spread has already improved to $32,540 (I kid you not!) and that's up $14,740 (82%) in 7 weeks - not bad for a free trade idea, right?  

You can get our morning post and trade ideas like this sent to you daily via Email, before the markets open by SUBSCRIBING HERE.  As this one trade made $2,000 a week for 7 weeks - do I really have to explain the value proposition???  

Of course, since it only cost $17,800 to make $2,000 a month, we had plenty of cash (remember cash, I love CASH!!!) left over to pick up the Baker Hughes trade as well:

  • Sell 10 BHI 2017 $50 calls for $7.50 ($7,500 credit)
  • Buy 10 BHI 2017 $40 calls for $12.50 ($12,500 outlay) 
  • Sell 10 BHI 2017 $45 puts for $5 ($5,000) 

That spread had a net $0 cash outlay (but does use margin, of course) and now BHI has recovered a bit and the net of the spread is already $2,100, which is infinity percent starting from $0.  Nowhere near as sexy as the more aggressive AAPL trade but this one will pay $10,000 if the Haliburton (HAL) merger goes through above $50, which we think is very likely.  The Apple spread, on the other hand, will pay $60,000 if AAPL is over $110 in Jan 2017.  That's why AAPL was our trade of the year and BHI was our runner-up.  As I said on 8/26 after posting the above trades for our Members: 

"We certainly don't want to over-extend but, when our trades of the year go on sale – isn't that what our sideline cash is for?"  

This is why PSW Members don't fear going to CASH!!!  There are always new opportunities in the market and, using options, we are able to deploy very small amounts of cash while using the margin from our sideline piles of it to generate some very nice returns while we wait for the market to give us some better entries.  

While we have certainly been grabbing some cheap stocks along the way, we remain "Cashy and Cautious" until and unless the indexes show us they can sustain a move over those strong bounce lines.  If the market is going to be bullish - surely the NYSE can give us 38 more points, right?  If that happens, long on /TF (Russell Futures) is surely the way to go but, for now - we watch and we wait - patiently....