Well, I assume you got the memo by now that last week was the best week for the S&P500 since July 2009, seeing an almost 6% rally and closing at 2 month highs. From a technical standpoint the index is a at a fairly important inflection point at the top end of the trend channel of the last 2 months, capping the largest % rally so far this year without a pull back of 2% or more.
As readers of the site know I have largely been sitting on my hands since covering most shorts near the lows on Oct 4th and was not committing to buying the ensuing rally we got off of the lows……On Friday, even as it appeared that we would be closing the week on a high note, I started to put out some shorts in front of what will be some fairly important earnings releases.
There are 3 fairly important factors that will determine the balance of the year for the equity markets; 1st: comprehensive plan to solve European debt crisis and re-capitalize their banks; 2nd: U.S. economic growth and strength of U.S. corporate earnings and lastly, 3rd: the existence or the pace of China’s economic slowdown. This week we are likely to get some data that should help shed some light on all of the factors……
Overnight we will get a reading on China’s Q3 GDP expected to be 9.3%, followed by industrial production and retail sales…..In the US we get industrial production and Empire manufacturing followed by PPI and CPI Tues and Wed and then a bunch of housing, claims and Philly Fed in the back half……Big earnings reports by C, WFC, MS and GS will be the focus for financials as APPL, INTC and IBM will give us a good reading on the health of Tech spending and consumer demand. I guess the main event comes next Sunday as this past weekend at the G-20 meetings in Paris, central bankers and fiance ministers set the Oct 23rd summit of European leaders as the deadline to agree on the proposed solution to the debt crisis……… [PRIVATE]
If I had a crystal ball to help guide my trading in the coming week or two I would probably see that the China slowing thing will take some more time to play out and that U.S. corporate earnings are ok, for now…..the European debt crisis “solution” is likely to the gift that just keeps on giving…..
So with the markets up 13.5% in 2 weeks, and finding myself with some fresh powder from not getting caught short during the rally, I thought Friday afternoon was a great time to start to wade back in the water from the short side.. Thursday I took off a couple solid winners on the long side in AAPL HPQ and GOOG (this one prior to earnings, doh!) and started to look for ways to define my risk while gaining short exposure prior to earnings reports this week in near term extended names like AAPL, IBM, INTC and then some banks that are pure sentiment shorts like MS and GS. In all instances I am defining my risk with long Premium bets and only risking what I am willing to lose…
TRADES THAT I CLOSED LAST WEEK:
-2 Long AAPL Trades for gains….Oct call spread (read here) and Oct call fly (read here)
-Long Jan HPQ call spread for a gain (read here)
-Sprint Feb call spread for a loss, but Sprint common for a gain (read here)
–JPM Oct wkly Put Butterfly that I initiated prior to earnings and made nice gains but if was more patient could have been a home run (read here)
THE MORAL OF THE STORY HERE IS THAT IF I HAD WAITED TO TAKE ALL OF THESE POSITIONS OFF ON FRIDAY’S CLOSE THEY WOULD HAVE ALL BEEN A LOT MORE PROFITABLE….BUT AGAIN I DON’T HAVE A CRYSTAL BALL AND IN A MARKET LIKE THIS I AM ALL ABOUT BOOKING PROFITS WHEN I HAVE THEM, ESPECIALLY IF I NO LONGER HAVE STRONG CONVICTION.
NEW TRADES LAST WEEK:
-Long MS Oct Puts (read here), looking to leg into a put spread and Long GS Oct Put Butterfly (read here).
-Long AAPL Oct Put Spreads (read here). There are 2 trades here, one with tighter strikes and less premium and the other wider and more premium. This is the ultimate contrarian play, I have no smoking gun here, but I am willing to take 2 winning trades in the name in the last 2 weeks and try to pull off the trifecta.
-Long INTC Oct Puts (read here), low premium low probability, low conviction bet into earnings.
-Long IBM Oct Put Spreads into next weeks earnings (read here), similar to the AAPL, call all things seem to be going just fine here, think the name is a bit extended and the least bit of less than perfect news an the stock could sell off 5%.
ALL of the above bearish trades fit within my market thesis that we are a bit extended here and that a 25-50% re-tracement of the recent move could be in the cards and any stock specific news in names like these could see the stocks out-perform on the downside near-term.
SO THE NET OF ALL THIS IS THAT I WAS BEARISH, COVERED WELL AND AM NOW GETTIG SHORT AGAIN….AND THE MAIN POINT I WOULD MAKE ABOUT COVERING IS THAT I DID BECAUSE WE WERE REALLY OVERSOLD, NOT THAT I THOUGHT THE SITUATION GOT MUCH BETTER IN A MATTER OF DAYS.
IF US EARNINGS, AND CHINESE DATA SURPRISE THIS WEEK AND IT APPEARS THAT EUROPE HAS ITS PLAN TOGETHER THAN I WILL HAVE TO RE-EVALUATE THIS THESIS, AND I AM BY NO MEANS GOING ALL IN ON THE SHORT SIDE…..BUT WITH THE MARKET RALLY GETTING A LITTLE GIDDY/FROTHY/EXTENDED I WANT TO TAKE A SHOT HERE…..
ALSO, THIS MAY BE THE MOST IMPORTANT THING I EVER SAY TO READERS OF THIS SITE AS IT RELATES TO OUR RELATIONSHIP…….YOU SHOULD NOT BE COMING TO RISKREVERSAL.COM FOR THE CONSENSUS VIEW, YOU WILL NOT FIND THAT HERE. THE TRADE EXAMPLES ON THIS SITE ARE JUST THAT, WAYS THAT I WOULD ATTEMPT TO MAKE CONTRARIAN TRADES WHILE DEFING YOUR RISK…..
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