The short positions Phil outlined (below) are hedges against long positions – part of a balanced strategy, NOT isolated trade ideas. Phil likes buying puts on companies/stocks that he thinks have a lot of room to fall. But currently, the market is in a bullish mode.
Predicting when a reversal will happen is very difficult. Moreover, Lee Adler’s research suggests that the “reversal” is at least a month or more out.
On to the newsletter.
This week, Allan is sharing his weekend subscriber update with us:
Allan’s Market Analysis
Periodically it’s helpful to stand back and look at the big picture. No better time to do so than at the end of the first quarter of the year.
We follow over fifty indices, stocks, commodity ETF’s in various time frames. This snapshot focuses on the major market indexes, not so much because the system did so well the past three months (although it helps), but because I don’t want to clutter nor confuse my point.
The major stock market indexes, e.g., the DJIA, SPX, NASDAQ and IWM, have been LONG the entire first quarter. Being long was the easiest way to play the market. Not a single trade the entire quarter – simply buy and hold LONG. Throw in a little leverage with a popular and liquid leveraged ETF like TNA and the gain was 35% for the quarter. The same simple approach also worked for the most highly visible stocks. AAPL. Our brand of trend following has been LONG AAPL for the entire quarter, for a gain of 50%.
This is the essence of the underlying principle of trend following: Identify the dominate trend and align your money with it. Just knowing what side of the market to be on, as these returns suggest, is worth of the price of admission.
Which brings up the subject of the current trend and the beginning of the next trend, the one down. As much as I have anticipated that next trend, the truth is anticipation has nothing to do with trend following. Notwithstanding a severely overbought market with excessive bullishness, the trend has yet to turn down. When it does, whatever may have been missed by not participating fully in the first quarter’s rally, will be made up and maybe dwarfed by that next trend. The price of catching that trend is waiting out a few daily bars of the decline before the algorithm places the red arrows on the daily charts. This trend hasn’t changed the entire first quarter and it has been right in not doing so. It has beaten the doomsayers and roaring bears and eventually, when their bear market does assert itself, it will join in the fireworks.
My takeaway from the first quarter is to trust these major market trend models and let them identify our next trade opportunity. Another three-month trend, especially if it is down, is just what we need to lock in a profitable 2012. So far, so good, and we have 3/4 of the year to go, plenty of time to build upon the gains above.
First of all, AAPL is due for a walloping (I lived in the South for 25 years). The 60-minute model triggered SHORT on Friday. I sent it out. Along with the hourly charts, I use 30-minute charts in my own trading. The TZA 30-minute chart triggered LONG on Wednesday and has now hit its trend line twice and refuses to break down through it. It hit the trend line on Friday and closed near its highs. I think its trying to tell us something, we should know early next week.
That’s the kind of analysis and trade ideas that I’m starting with in the new service…some subscribers want to trade more….it’s in our blood.
For a risk-free trial, click here for Allan’s standard service, or click here for the premium service. The premium is for more active traders. For more information, see “Can you trade a chart like this.”]
Note: Phil is also bearish on oil: “Speaking of people who are soon to be screwed, oil speculators are about to get their gas handed to them as there are over 570M barrels worth of open contracts at the NYMEX scheduled for delivery in the next 3 months alone and we’re already way over any prior level of storage capacity.” (Bespoke chart).”
Scott Brown of Sabrient likes buying Assurant Inc. (AIZ, $40.50) and selling a call against the shares. For example, buying 100 shares and selling a June call with a $42.5 strike price. The company’s forward p/e is 6.6, and Scott expects a 5-year growth rate of around 10%. AIZ is rated a strong buy according to Sabrient’s rating system.
Update: Monday, Walter of Sabrient presented several long trade ideas, based on searching for GARP stocks (growth at reasonable prices) in Sabrient’s “My Stock Finder.”
General Motors, Co. (GM)
Cyclical ConsumerDeckers Outdoor Corp. (DECK)
Cyclical ConsumerCVR Energy Inc. (CVI)
EnergyUnited Therapeutics Corp. (UTHR)—Healthcare
Pharmboy submitted a biotech trade idea for next week. “Our biotechs have been on a huge run. I expect it to end soon. The biotechs should begin a holding pattern. Seattle Genetics (SGEN), Curis (CRIS), Infinity (INFI) and Protalix (PLX) are part of our core holdings, and all doing well.
“A new stock I like is Neurocrine Biosciences (NBIX, $7.97). NBIX is back with two more drugs, one for endometriosis (elagolix) and the other for tardive dyskinesia (VMAT2 inhibitor NBI-98854). The stock took a hit on abnormal results for NBI-98854, but that spells opportunity. The drug appears to work. The clinical trial sites need to do the work correctly (read more here). I like a speculative play, buying 3 November $6/8 bull call spreads and selling 3 $6 puts for a net $0.55 debit. If NBIX holds where it is now, it would be a net gain of $1.45.”
[Click here for Pharmboy’s portfolio to date.]
Phil provides a number of speculative short trade ideas. He likes buying puts in overpriced companies to offset long positions in companies that are trading at more reasonable valuations.
Many of these puts are trading lower than when Phil initially mentioned them – i.e., trading at losses. The stocks listed below are still stocks that Phil would be comfortable shorting or buying puts on as hedges for long-term bullish positions. These are not trades to be taken in isolation. Phil is using puts as hedges for bullish positions. Shorts on the companies below may do well if the market decides to stage an overdue “correction.”
By Phil Davis (Friday, March 30, 2012)
The following is a Long Put List Update with my original 3/15 commentary (rather than rephrasing it – you get the idea) and possible roll suggestions, or new entries:
[From March 15]: We’re not likely to get any real bearish fireworks until the Euro fails $1.30 (now $1.3046). Keep in mind that the Swiss absolutely do not want that to happen so there’s at least one Central Bank on a mission to support the Euro (and thus keep the Dollar below 81) but, it’s a relatively small Central Bank. So we turn our attention to the BOJ, which doesn’t care if the Dollar or the Euro goes up, as long as the Yen gets weaker against one of them. Obviously the BOJ prefers both and it has been alternating its Dollar and Euro purchases. It’s been working great with the Yen now at 83.26 and the Nikkei up like a rocket at 10,050.
Anyway, it doesn’t matter WHY the market is going up, we just have to buy stocks and hold it until these levels crack (which may be tomorrow or Monday – we have to be patient). Assuming no big collapse tomorrow, we will redraw the Big Chart over the weekend and the 10% lines will become the Must Hold lines with some possible adjustments. Our top 10 list that has now run its course for S&P over 1,360 will give way to a new top 10 list for S&P over 1,400 and, no matter how silly it seems – we need to follow the market.
HOWEVER, we can use that low VIX and insane attitudes to place a few outlying bearish bets, like yesterday’s Long Put List. I mentioned PCLN in the above post but here’s the list and the idea is to buy puts that are CHEAPER than they were when I originally picked them, and to take profits when they work, and then switch to a fresh horse of the ones that are CHEAPER again.
This way, we keep betting on stocks to fall that are even higher than they were when we first thought that they were overbought. PCLN, CMG and LVS are on the top of my list with PCLN and LVS both plays on China slowing, while CMG is just annoying. Here’s my whole list:
Note: the “was” prices are old, low prices; the first “now” prices are from March 15, and the “currently trading” at price is from Friday, March 30, 2012.
AXP (was $12, now $56) July $49 puts at $1, now $0.76 – down 24% – roll to $52.50 puts ($1.38) for $0.62. [It will cost $0.62 to “roll” the July $49 puts to higher strike price puts, the July $52.50, i.e. sell the $49 strike price puts and buy the $52.50 strike price puts.] AXP is currently (Friday, March 30) trading at $57.86.
BIDU (was $11, now $139) June $100 puts at $1.05, now $0.55 – down 47% – roll to $115 puts ($1.60) for a cost of $1.05. BIDU is currently at $145.77.
CAT (was $24, now $113) May $95 puts at $0.95, now $1.50 – up 58%. CAT is currently at $106.52.
CMG (was $40, now $401) June $300 puts at $2, now $1.10 – down 45% – roll to $330 put ($2.25) for $1.15. CMG is now at $418.00.
FAS (was $8, now $103) July $60 puts at $2, now $1.70 – down 15%. FAS is currently trading at $109.15.
GE (was $6, now $20) Sept $19 puts at $1, now $0.94 – down 6%. GE is now trading at $20.07.
GOOG (was $250, now $620) Jun $500 puts at $2.80, rolled to June $540 puts for $2.65 on 3/20, now $4.10 – down 18%. GOOG is currently at $641.24.
HD (was $18, now $50) Aug $43 puts at $1, now .72 – down 28% – roll to $46 puts ($1.22) for $0.50. HD is trading at $50.31.
IBM (was $70, now $205) Jul $155 puts at $1.05, now $).70 – down 33% – roll to $180 puts ($1.65) for $1. IBM is trading at $208.65.
ISRG (was $80, now $531) July $375 puts at $3, now $2.50 – down 16% – roll to $430 puts ($4.70) for $2.20 [costs $2.20 to roll the puts, i.e. sell and buy new ones]. ISRG is currently at $541.75.
IWM (was $35, now $70) Aug $65 puts at $1.25, rolled to Aug $71 puts for $0.85 on 3/20, now $1.67 – down 20% – roll to $76 puts ($2.70) for $1.03. IWM is now trading at $82.81.
KO (was $40, now $70) Aug $65 puts at $1, now $0.50 – down 50% – roll to Aug $70 puts ($1.20) for $0.70. KO is now trading at $74.01.
LVS (was $2, now $55) June $50 puts at $1.85, rolled to June $55 puts for $1.50 on 3/20, still $3 – down 10%. LVS is currently at $57.57.
MA (was $120, now $425) July $320 puts at $3, now $2.60 – down 13% – roll to $350 puts ($5.40) for $2.80. [It costs $2.80 to move to the higher strike price puts.] MA is currently at $420.54. It dropped $7.68 on Friday, March 30.
MMM (was $42, now $89) July $77.50 puts at $1.10, now $0.90 – down 27% – roll to $82.50 puts ($1.62) for a cost of $0.72. MMM is now at $89.21.
PCLN (was $150, then $30, now $650) July $520 puts at $7.10 (see yesterday’s post re. adjustment history), now $5.40 – down 24% – roll to $550 puts ($7.60) for a cost of $2.20. PCLN is currently trading at $717.50.
QQQ (was $26, now $66) July $61 puts at $1, still $1 – even. QQQ is now at $67.55.
V (was $42, now $117) Sept $95 puts at $2, now $1.90 – down 5%. V is currently at $118.00.
XRT (was $15, now $61) June $59 puts at $1.90, now $1.60 – down 16% – roll to $62 puts ($2.75) for $1.15. XRT is currently trading at $61.25.
We’ll touch base on these on a regular basis but understand these are SPECULATIVE shorts. We pick a few and the market goes up and we lose 50% and we pick a few more next month and we lose 50%, and a few more next time, and we lose 50% and then it’s July and the S&P is at 1,500 and all we need is a nice 150% gain on something and we’ve got our losses back. If we never win – then we’d damned well better have some bullish bets that are making good money to offset it because these are now the hedges as we are forced to be bullish until the Fed runs out of money or that asteroid hits the Earth – whichever comes first…
The trick is to SCALE into shorts and DIVERSIFY the risk so that a winner can help fund your rolls on losers. When we roll or double down on a position, our primary goal is to get 1/2 back out even. That puts us back to a smaller entry with cash on the side which we can put into the next roll, if necessary. We keep putting ourselves “in the right place” and, eventually, if we catch it at the right time, we have very strong put positions that can catch a major selloff.
Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. We make no representations that the techniques used in our rankings or selections will result in or guarantee profits in trading. Further, our analyses are based on third-party data, which we cannot guarantee as to adequacy, accuracy, completeness or timeliness. We accept no responsibility for any loss arising for use of these materials.
Hypothetical or simulated performance results have certain limitations unlike an actual performance report. Simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.