Thursday Thoughts – Holiday Weekends Go Better With Cash

"I've been up and down and over and out and I know one thing
Each time I find myself flat on my face
I pick myself up and get back in the race

That's life (that's life), I tell you I can't deny it
I thought of quitting, baby, but my heart just ain't gonna buy it" – Sinatra

What a crazy way to start the month!  

As you can see from the S&P chart above, we went nowhere, despite Monday's massive 2% pop, which was quickly followed by Tuesday and Wednesday's 2% drop.  So here we are again, testing the same strong bounce lines we were watching last week which, to summarize, were(as of yesterday's close):

• Dow 17,720 (weak) and 17,850 (strong)
• S&P 2,055 (weak) and 2,060 (strong)
• Nasdaq 4,865 (weak) and 4,905 (strong)
• NYSE 10,880 (weak) and 10,910 (strong)
• Russell 1,235 (weak) and 1,245 (strong) 

As usual, the Russell is leading us up and the Dow is dragging behind – even with the addition of AAPL this week.  When in doubt, we stick to the 5% Rule™ and just wait to see if 3 of 5 of our strong bounce lines turn green, THEN we can go long on the laggards.  Otherwise, we're not going to be impressed – especially by low-volume, BS rallies like we had on Monday which, fortuntately, we stayed short on.  

Click on picture to enlarge

I've mentioned that our Short-Term Portfolio had been left very short, since we cashed in most of our Long-Term Portfolio last Tuesday (see also, "Why Worry Wednesday – We're in CASH Suckers!").  When we cashed out the LTP on Tuesday, the markets were peaking and the STP was down to $183,820.90(up 83.8%) when we reviewed it Wednesday Morning (7:17 am in our Live Member Chat Room).  Now, just a week later, with no changes, those same positions are up 107.3% at $207,325.90 – that's a gain of $23,505 (12.7%) in a week!  

This morning, for example, the Dollar has fallen to 97.94 and that is down half a point from yesterday and it's falsely supporting the Futures and the Russell is at 1,249 and we can short /TF (Russell Futures) here with a stop at 1,251, which would be a $200, loss per contract (our risk) but hopefully we'll get a ride down to at least 1,245 for $400 – so we like the risk/reward ratio on that trade.  

TZA is the ultra-short ETF on the Russell and it's down to $10.11 and you can play that straight if you are afraid of options or futures or you can sell the April $10 put for 0.30, which obligates you to own TZA at net $9.70 but anything over $10 (Russell below 1,270) two weeks from tomorrow (17th) will let you keep $30 per contract.  If you are willing to own $9,750 worth of TZA, you can sell 10 contracts for $300 and that will be your profit in 15 days (3% of capital at risk).  That sure beats what the bank pays you, right?  

Another way to go long TZA from here (and we have a lot of TZA longs in the STP) is to buy the April $9 calls for $1.20 and sell the $10 calls for 0.50 for net 0.70 on the $1 spread that's 100% in the money to start.  Here, you just risk the 0.70 ($70 per contract) you put into the trade and, if TZA is over $10, you get the same 0.30($30 per contract profit) so now you risk $700 to make the same $300 and that's a 42.8% return on capital at risk in 15 days – MUCH better than the bank.

Of course, if you combine the two, and sell 10 TZA April $10 puts and buy 10 of the April $9/10 bull call spreads, your net on the whole spread would be just 0.40 and now you make 0.60 (150%) on your cash in 15 days.  

See – Options are Fun!  

Markets are closed tomorrow, have a very happy holiday weekend, 

- Phil