Hold on for a Ride Up

Looking at the market before the open this morning, of course I wish I had a lot more Financial stocks than I do. The UYG and XLF will explode higher this morning. I had been short financials by selling the puts of SKF, a short fund. But I closed out my position yesterday because I hoped the actions that took place would happen. I closed it with SKF running very high on fear at $140. Today, SKF may open below $90. Boy, that was close. That would have been expenisve if I had not gotten out yesterday.

Meanwhile, the very large Goldman Sachs position I hold is looking a lot better. It was trading as low as $85 midday yesterday. I own it at $172 (actually, the options, but the loss would be the same). Today, it looks like it will open above $140 and could go to $160 during the day, getting me back close to even.

So, though I won't have a chance to get back into my long UYG position (the opposite of SKF), because it is soaring in the pre-market, I am happy for what I have. Hopefully you will also have a very nice market day with the action in front of us.

Be glad you are not a professional short seller with big short positions in Financials (hedge funds, Al Queda?) They will be wiped out if naked (not covered by equal long positions)

Staying alive in this topsy-turvy market

It has been a week since I last posted, and what a week it has been. We witnessed Hurricane Gustav and its less than disatrous landfall, the postponement and then spectacular conclusion of the Republican convention where we were not disappointed by Gov. Palin (really, better than hoped for) and Sen. McCain. And we saw another week of violent whipsawing in the stock market.

What to do?

I have been successful playing the whipsaw. I don't see any other way to go, other than to hunker down in cash and take a long nap. In my trading account (my retirement accounts are full of conservative high dividend, buy-and-hold stocks and funds) I continue to play the trading range of the Financial index. UYG and SKF are the two bookends of the trade, SKF being short and UYG being long. They are both based on the XLF S&P index for Financials, but levered by 2X. The XLF range is oscillating between 20 and 23 since mid-July with a round trip every 10 days (which is very volatile).

In the latest cycle, I closed out my UYG Sept 25 sold puts contracts on Wednesday for around $3 (with the XLF around 22.00). Then I sold puts on the SKF October 125 for $20. On Thursday, at the open, the XLF moved to 22.50 and I could have sold more SKF puts at $23, but I held on as I was in the red. By Thursday close, the XLF had dropped 6% and was at 21.50. My SKF puts were in the black.

Today, on Friday, the XLF continues to drop and is now close to $20. The SKF which was at $110 on Thursday at the open, is now at $123. UYG has gone from $23.50 to $20 as of now. As mentioned, $19 or just a little less, is the low end of its 7 week range. I have a "buy to close" order on the SKF puts at $10.50 and a "sell to open" order on another round of UYG sold puts (Sept 25) for $7 (which will execute when UYG gets close to 19). I expect to close out the SKF today or Monday, depending on how quickly the market drops, and then get back in for the ride back up on the UYGs next week. I will continue playing this cycle until I can't.

Another trade on the horizon is selling more PWE canroy puts short. PWE is approaching its 24 month weekly low of $25. (it did hit 23.50 for one day on Jan. 24). It has corrected back to the level it was at when Nat Gas was $5.50 and oil was $70. But they are not at those low levels. PWE gets sold down hard by speculators even though it is not a speculative stock with its 15% dividend. It will always bounce back based on solid cash flow for the forseeable future.

The PWE Dec 30 put is at $5 as of today. I have orders in to sell puts at $5.50 and $6, giving me prices of $24.50 and $24 on the underlying stock if assigned. I will take that price on PWE any and every day.

Playing the Rotations at the Bottom

Today I am sharing with you some of my recent experiences in "playing the rotations". While I don't have any evidence that the current market is typical of a deep market selloff, like we just experienced (I would need to research in detail 2002-03 and 1991-92 to make a proof), it is logical. At the bottom of a deep selloff, the typical pattern is a "smiley face". The price action decelerates from the selloff into a long "basing" pattern where there is much treading of water. Traders will just move between sectors to get some action during this sideways trend. The market will consolidate behind typical early stage leaders as the market moves up the right side of the smiley face, which might be 2009 or even 2010 given the depth of this selloff.

A good example of the "Smiley Face" basing pattern is the US Currency vs. other world currencies. There is an ETF with ticker of (UUP) that allows us to chart this pattern. Notice how the declining trend is broken by the right corner of the smile. The breakout above the declining trend line at around $22.70 on July 17 (same day as Financials bottomed) was the buy signal.

So, for those who want to stay active in the market, a shorter term trading mentality is required, for at least part of the portfolio. A close eye on individual sectors and their trends along with well defined buy limits and sell stops (at chart bottoms and tops) are a must.

Today I made a couple trades that reflect this concept. I have been playing the basing of the Financials sector, as expressed by XLF or its levered cousin, UYG on the long side from $20 on up. But when UYG gets to $23, I jump back into SKF, the inverse ETF fund for the Financial sector (goes up when financial stocks go down). This pattern has been very solid since late July and I have participated in each direction each time, using sold put options on the near month, making profits on both the up and downside. This trend could continue much longer. If the financials bottomed on July 17, it will take some time before they regain their earning power so that the stock prices can advance significantly. In between, the price will just gyrate in a fairly narrow zone, as it has for a month.

I have created a "Prophet Chart" on the UYG to illustrate this action and the potential buy and sell levels based on the short term trends (usually only a few days long each). It is easy to see the pattern than is now established between $20 and $23 on this chart. This sideways action can continue for some time, until fundamentals change significantly one way or the other.

Another chart that shows promise for the sideways action is the Tech index, XLK. There is a levered version of this sector as well, the ROM which will provide a lot of volatility in its near term options. Because the Tech sector was not as overpriced in 2007 and so was not as damaged by the selloff, it is possible, even likely, that the XLK will break out sooner rather than later. Tech is typically an early cycle sector. As soon as the economy looks to recover, the Techs will break out. See the flag pattern on the chart? This is the narrowing funnel trending the highs and the lows. If the price action breaks out of a "flag" pattern, it will have quite a bit of momentum. Watch to see if XLK breaks out to the high side, at around $25.

Finally, let's look at the Energy sector, XLE. Here is a sector that has had a large correction, but looking over a one year time frame, it can be shown that the correction may have just run its course, as it approachs the bottom from January this year. There is definite trading support for oil at $100 a barrel. So, unless we are entering a deep global recession that shuts down demand, the trading action shows that we are nearing the bottom of the materials / commodity selloff and are getting ready to bounce (and may have done so today). The price line today is just moving above the downward trend line of the recent highs. The best way to play this sector is to the upside, but with very tight stops to get out if the economy does change the fundamentals of the commodity boom, drying up demand.

See you soon.

Bad Open on July 22

Wow…didn’t take long for more bad news to hit the stock market.

Merck and Pfizer and other big pharmas are getting killed today and in after-hours. Merck is down to $33 from $37 just a couple days ago. Glad I am out of Merck and Pfizer.

Apple is also getting beat up. Bad earnings report and disappointing I-Phone sales (just a few days after the launch of the new 3G version was declared a major success). There is also a story about Steve Jobs being sick. But this just shows how neurotic the market has become.

Financials were looking better and then, wham!, along comes American Express’s Q2 report and depresses the whole market. The good pop on UYG and XLF this morning were all but gone by the end of the session and are well below their closes in after-hours.

So, if the market continues to act grumpily in the morning, I will be selling forward my recently acquired (this morning) UYG August sold puts to September at the same strike of 25. This will get me a little more premium and also more time. It should not be too hard for the Financials to get back the 25 strike when the market decides to be happy again, as it was there as recently as early June. The BAC and C quarterly reports showed clearly that unless there is another big bomb in the Financials, that the market should start repairing itself. C and BAC look good as does JP Morgan and Goldman. Freddie and Fannie have been backstopped, so no real danger there. I don’t think Obama or McCain will get tough on government bailouts. Obama would be very favorable to bailouts as a large government Democrat. And affordable housing for the middle class is sacred to Democrats, so politically, Financials should do well as the elections approach.

Jeff, you must be happy the market is finally looking kindly at Valero. Funny how a little story in Barrons makes such a big difference.

UYG: an Interesting Financial Options Play

The UYG Sept 08 45 option is now at $15. (UYG is an ETF from Powershares and is leveraged to double the XLF index). Maybe get a couple more contracts to average up? Could also wait a few more days to see if the financials decline some more. It is possible. They have been trading in a range, though I don't see much to drive them down short of some surprise blowup at a big bank.

Trading Off the Bottom

I made a couple of trades this morning (Tuesday, March 18) before or at the open, based on the turn around in sentiment over night. Goldman Sachs and Lehman both reported better than expected earnings and revenue for the last quarter (ended on Feb 29). GS was up almost 100% on earnings estimates. A couple of days ago, these "beats" would not have mattered to the market. The market was selling on good and bad news. But today, with the moves by the Fed yesterday (Sunday-Monday) to back up even the investment banks with the discount window, lower discount window rates (3.25%) and acceptance of collateral as low as BBB rating (basically "junk"), the market psychology towards financials has done a 180. I was just shorting financials last Thursday and Friday. But, you know the old proverb "don't fight the Fed"!

Yesterday I doubled up on some options for January 09 expiration (sold another 5 put contracts on BAC $45 for $12.10). I also pushed out my WM $17.50 put options to April expiration, from March (this week) to give the market a little more time to get its footing on financials. Both these moves are already paying off today.

This morning, I sold short 100 shares of SKF, which is the 200% inverse ETF on the XLF financials index. The SKF goes up when the financial stocks go down, and vice versa. By doing this, I am able to take advantage of the move up in financials today (and probably the rest of this week) double the market return, and do so with borrowed money on my margin account. I will take this one off within 4 days because it is so volatile. I also bought another 5 Call contracts on the BAC Jan09 $50 for only $0.95. That is a cheap bet that BAC, which has acquired the assets of CFC, will get back close to where it was in late October. All the options and short moves are in my "speculation" accounts with less than 10% of my total portfolio, or my "Mad Money" to use the overused phrase of Jim Cramer.