Thursday, February 3, 2011

So you're thinking the market is a can't lose proposition ehh? Think again.

Turn on the TV, open the Paper let's party like it's 1999.

The Good and what's working now.
So here we are Feb 3rd 2011 and the market has continued it's crazy strange fed induced run. The big play has been to buy the dips and to be honest until this stops we continue to go up. I've been playing long call spreads on the several sectors, coal(JOYG, PUDA, WLT), chips(ARMH, TQNT, SWKS) and have been buying long term leaps on SLW and AGQ(3x index on silver). 

The metals:
I was dead on with the sell off in the silver/gold trade I wrote about back on the 1st of January and had you put on some short trades you would have made more money going down than going up. Now it's time to start getting back into the SLV and SLW trade. Do I think these will rocket I think they go sideways to up as the weak hands have been shaken out and it's those of us that understand contrary to the publicly released CPI report by our beloved government that inflation is skyrocketing. Build a position in the SLW where there simple business model is pay no more than $4 an ounce for silver to all the miners that are mining other metals and well as long as silver stays above say $6 it's really a no brainer. 

The Chips:
I like QCOM here and if you can pick up INTC under 20 I like it with a long call leap spread. Also if you're into a little risk which I think we all are else we wouldn't trade options, take a look at MU. There business has been boring on DRAM but recently they've changed their business model and are now competing with SNDK in the exploding flash memory business. This stock is dirt cheap and the downside is practically nill since none of the analyst know how to grade this company yet on it's new business while DRAM prices go nowhere. This could be a 5 bagger in a few years for sure as the reports coming out say their flash memory is better technology than SNDK. If you are unfamiliar with flash memory then you should read up on this as every mobile device, phone, tablet etc uses these. I also like SNDK.

The Bad
Repeated from my last entry on Jan 1st....."I have been very vocal in my skepticism of this market rally that we've been in for now WAAAAAY too long. As they say you can't fight the tape so you have to hold your nose and buy but I've been playing it conservatively and selling my upside with calls....which again won't make you rich but will help protect you when this crazy market corrects. The close in calls will increase while the far out calls will not move a lot. Ultimately I want the market to go down short term and I'll buy those calls back when it does. If it doesn't I'll roll them out to next month and wait on the correction. What you ask will cause the correction.....If I knew that I'd be rich and retired already but I can tell you it always happens when you're least expecting it." 

I still feel the same way as repeated up above. I have been taking a longer term approach to the Chip sector with long call leap spreads but everything else I'm keeping tight call spreads against until the shakeout comes.

I repeat this thought again from my last post as nothing has changed, "Everything in the market is pointing to oversold, the talking heads on CNBC are overly bullish for 2011 and bullishness is rampant on the street.

The Ugly
The situation in Egypt is only the beginning overseas as far as I'm concerned and will ultimately lead to more inflation thus the need to buy Oil, Gold and Silver. I like the AG stocks as well and am playing MOS for the fertilizer space but like CF, IPI and AGU as well. 

As for the overall economy I think $3+ gasoline will start to hit peoples wallets and this will in fact slow down spending by the average consumer. 

Interest rates are on the rise and finished at a 10 month high yesterday to 4.64%. History says if the 30 year Treasury gets over 4.9% watch out below for the equity market. What this means is at that rate everyone that rushed into the market to buy long term bonds in the past year is now under water and this includes mom and pop that rushed in to buy these last August. This also includes China and Japan which bought and worst yet and you'[re going to love this our gold on United States of America Federal Reserve. 

Let me let you take that in for a moment and catch your breath. Yes folks while our government is running huge trillion dollar deficits your Federal Reserve was borrowing money through quantitative easing so it could buy treasuries. So now the Fed is losing money on the borrowed money. Sort of like taking a cash advance to go to Vegas or to play the ponies. You know you're going to lose it but figured its for entertainment. Well guess what this is your children and their children's future the Fed is gambling with here. Borrowing money to purchase bad investments is never a path to prosperity. 

Jobless claims fall down to 42k to 415k today and that's supposed to make us feel good. Give me a break most of America has been under snow for the past 2 weeks....who is going to get out and look for a job or file unemployment in a foot of snow. Don't believe these numbers. Yes the job market is getting a little better but we need to post 200k net new jobs every report just to keep up with population and graduation rate growth. We would need to do that for 3 years every month in order to get back to where we were in 2007. Don't believe the hype and think for yourself. 

The Market
I said back on Jan 1st, the following, "I took a quick look at the options activity on the S&P 500 and what I found is I do still believe we get to 1300 and I think we get there quickly....within a week or so.....but then I think we go nowhere. I don't think we'll get a huge sell off for more than begin with....then we go flat for a while before another leg down."
This still stands today as we've passed 1300 and Dow 12000. These numbers mean nothing except the media will throw them all over the place, suck the last mom and pop into the market and then and I say again keep an eye on the 30 yr., the gauntlet will drop and hand all those late to the party their heads. Everyone is expecting a 5-7% drop but I have a feeling when this party starts people(mom and pop retail investor) will start buying at that 5% drop and we will go down from there as the smart money bets against the dumb money. I mean no disrespect to anyone in saying dumb money it's just those that follow the media are the herd and considered dumb money.

What to do and what to watch.
The market rarely gives you a chance to cash in your profits and hang out for the inevitable sell off like it's doing now. My advice take profits and or buy some puts and or sell some Jan/Feb calls against any long positions you have. If I'm right you'll thank me in a month, If I'm wrong you can buy them back as your underlying stock or options will continue to go up as well. This is no time to be play superman with your money.
1) Watch the 30 yr for that break above 4.9% thats your signal to get out of the equity market no matter what anyone tells you. History is on your side.
2) Keep an eye on overspill violence that might and could affect the passage of dry bulk items to Europe if the Suez Canal gets delayed or closed due to Middle East issues.
3) Keep an eye on oil, it could explode to 120 a barrel if number 2 happens. 

Agree? Disagree? I'd love to hear your take.

1 comment:

  1. Good post, very much aligned with my thoughts