Mr. Market Gave Us The Bird.
The market did not disappoint. We said the week would end 4% down. The Dow was down 4.6% from its opening and the S&P 500 is down 4.0% from its opening this week. Sounds a lot like 4% to me. Ahhh but you say the week is not over. Good point.
Traditionally Black Friday is a big positive day in the markets. There is a lot weighing on the market to make something positive happen on Friday so we are thinking a sideways move. Well call it plus or minus .5%.
Adding to the discomfort, China and Europe had some disappointing manufacturing news amplifying the concern about a global recession. (Hey didn't we just come out of one.) On top of that consumer sentiment slipped and jobless claims puffed up again. Thankfully our leaders in Washington are looking out for our best interest and keeping an eye on our fiscal situation.
So what's a blind folded casino monkey supposed to do. With the last of our darlings under extreme pressure (NUAN, FIO, AAPL, BPI, and a few others), we are thinking about sitting on the side lines and keeping cash and playing some options built around our long positions and some volatility plays.
We are proud to announce we took down our January VXX option making 31% for all relevant portfolios. Probably left some money on the table, but we are looking for another VXX option play. Keep in mind we DO NOT RECOMMEND options for everyone. They are very volatile and you have to make decisions quickly. It is a good way to make and loose money quickly and efficiently. If you want some basics on options, Jim Cramer does a great job of explaining the basics in "Getting Back To Even" O'Neil does a great job as well in "How To Make Money In Stocks".
Unfortunately, until the market settles down the only game in town is getting in and out of positions. Options provide a lower risk efficient way to play the volatility on index funds, commodities, and some stocks. We'll show you one you can try if your account is set up for level 1 margin options in a bit but first. . . .
CAUTION Technical Jargon ahead.
Our friends at Angel Publishing have suckered me into another newsletter. This one had an interesting indicator that I am impressed with. I have seen it and even used it before when I was taking that little seminar on option trading. I had also been exposed to it in the Bloomberg book Technical Analysis Tools. The indicator is MACD. It means Moving Average Convergance/Divergance. In essence it helps determine inertia AND direction in the trend of a stocks (Or index or commodity) price trend. Here is a pretty picture I stole from Wiki of a NASDAQ 100 ETF fund showing an MACD Overlay:
As you can see with my scribbles when the Blue Line (Longer term moving average) moves above the red line (Shorter Term moving Average) it appears at least for this index fund that would be a buy signal. When it inverts, it is a sell signal.
Now let's take a look at an option play on GLD our old friend that mimics the spot price of Gold. Here you see a 6 month Chart with a couple of overlays. On the bottom is the MACD overlay.
We have a hunch that Gold is going to rebound in the next few weeks. I don't think we have hit a bottom, but we could be close. You can see how back in June the GLD's MACD broke threw the Short term market and it was a buy signal at about $153. (Spot Gold was about 1,550 at the time). Then in August we see the price of GLD tap the upper end of the Bollinger Bands, and then look at the MACD. It breaks through the short term indicator to the down side signaling a sell indicator at about $178. That's a nice 19% gain if you were playing the stock long. Say you wanted to play an option back in June. You could by a 90 day call option slightly in the money, say 150 for about 1.00-2.00s. Then come August those call option are worth about 20-24 dollars. That would be a 1,000-2,000% gain. Sweet.
So here we are today with GLD at 164.00. With all of the Eurozone issues and consumer sentiment falling as soon as the dollar stabilizes, we should see a return to a gold and silver rally. Here is what we did. We bought the January 160.00 Call options for GLD at 9.55 a contract. (Each Contract controls 100 share of GLD. So for every 955 dollars we are controlling 16,000 dollars of GLD. We have the right but no the obligation to buy 100 shares of GLD at $160.00 a share on January 21, 2012). Obviously our break even is 169.55 (160.00 plus the cost of the contract 9.55) If GLD has a year end rally as we suspect, the sooner the price hits 170.00 the more the options will be worth. We will look at taking profits at 25% or $11.94.
So enjoy that bird and look at your stocks and add a layer of MACD and see how it compares to where you bought your stock and if your timing looked good?
Salve Lucrum
Salve Lucrum
