Volatility high = Put premiums very high

If you are willing to own some big cap names here at 40% lower prices and still collect an option premium, there are some interesting opportunities out there.

Write an AAPL June $150 put for $0.80. AAPL is currently trading around $235 (36.2% stock price decline required to lose money on option). If you believe AAPL will not trade down to $150 by June 18th then this is a money maker.

Write a GOOG May $390 put for $1.00. GOOG is currently trading around $493 (20.8% stock price decline required to lose money on option). If you believe GOOG will not trade down to $390 by May 21st then this is a money maker.

Write a BRK.B May $70 put for $1.00. BRK.B is currently trading at $74 (7% stock price decline required to lose money on option). If you believe BRK.B will not trade down to $70 by May 21st then this is a money maker.

Write a BP June $42.50 put for $0.83. BP is currently trading at $49 (13.2% stock price decline required to lose money on option). If you believe BP will not trade down to $42.50 by June 18th then this is a money maker.

Tried and true market signal vs. “Fundamental Analysis”

Something I wrote down many years ago when I first started following and investing in the stock market was…

Best long-term market timing system:

20 week moving average crosses over the 50 week moving average by one percent you go long… If it goes below by more than one percent you sell.

Everyone talks about esoteric technical systems like Elliot Wave or some crazy “can’t fail” chart pattern but in reality stock technical analysis boils down to two things.. support (and resistance) and most importantly TREND.

The 20/50 helps you get the trend part right.

How can you argue with a strategy (the 20/50) that:

- Got you to buy in the year 1994 at around S&P 450.
- Didn’t tell you to sell until year 2000 at S&P 1400.
- Got you back in the market in 2002 at S&P 900.
- Told you to sell again in Jan 2008 at S&P at 1450.

So given I know this signal and respect it, tell me what I was thinking back in the summer of 2009 when these two moving averages crossed again and gave a BUY signal at around S&P 1000? Why didn’t I buy there, I was actually just finishing selling my last longs at the time and shorting some things.

See Chart:

Basically I thought… “It’s different this time”.

The market had run from 666 to 1000 is just a few short months. I was long for most of it and felt like a genius.. Fundamentally I saw the economy was still very weak and there were many reasons good for us to go lower. All of these have been covered in my blogs and in other folks blogs.

I ignored the signal and did NOT go long. The only thing the signal did was keep me from trying to short and made me put ultra tight stops on the few shorts I tried because I realized the trend was against me. So the signal saved me lots of money I could have lost shorting but I did not buy the signal because of “fundamental analysis”.

A couple of weeks ago the market topped out at 1220, a full 20% above the 20/50 signal point.

That’s 20% that I missed on the long side because I didn’t follow a simple signal. There is a reason old pros say things like “charts don’t lie, people do”, “the trend is your friend”, “the market can stay rational longer than you can stay solvent”, etc.

It is because the market can always find a reason to go up or down that is disconnected from the fundamentals and informed participants are always surprised how far it will overshoot on the upside AND the downside.

The market is driven by panic, euphoria, outright manipulation, greed and a myrid of other human forces. In the long run it is fundamentals of course, but the long run is MANY YEARS.

So in summary the market has not really gone anywhere the last few weeks and you can see the red line gaining on the blue line in the all important chart above… Maybe the market has topped (no one knows for sure), but what I am SURE of is that the person who WAITS for the signal on the long and short side will always DESTROY the person who tries to pick bottoms and tops.

Trust the predefined mathematical market signals you believe in (whatever they may be) and not fundamental analysis if you are going to try to time the market.

New Stuff

Buys
BMY @ 24.45
SDS @ 29.8
NLY @ 17.2
AUY @ 10.20

Sales
RST @ 27.32 (32% gain, final lots)

Rosetta Stoned

That was some really good stuff, man. Sold 200 at $26.98 for a 26% gain. 200 left.

AUY put, FAZtastic no more

Put 200 shares of AUY @ 11. Trading at a slight loss considering option premiums, (5%) right now. Holding onto them until the cows come home.

The FAZtastic journey is over. Sold all lots @ 11.34 for a 75% loss. Lovely. Probably calling the top here by my action, too.

The Great Recovery in Pictures.

First lets take a look at the stock market over the last year.


Wow that’s quite a rally off the lows. Let’s see, what originally caused all these problems in the stock market?

If you had to sum it up in just a few sentences you would say that first real estate declined which caused people to get in trouble with their mortgages. That hurt the mortgage-backed paper, which hurt the banks, which lead to the mortgage crisis, which caused massive job losses. This caused even more problem like lower consumer credit, more job losses, more home delinquencies, etc…

Well looking at the first picture (of the stock market) I would guess that all of these issues have been solved or at least improved quite a bit…

First lets look at the crux of the problem, the housing market. To get a rally like in the stock market delinquency rates must have really improved or at least stabilized.
Lets look at the “prime” delinquency rate and see….

Fannie Mae Serious Delinquency rate:


Well, that doesn’t look very good. Actually the national delinquency rate has been skyrocketing in a “hockey stick” manner. 8.78% of all US mortgages are now at least 90 days late! In the bubble states the stats are pretty unbelievable. Florida’s statewide delinquency rate is up 7% over the last year and now stands at 19.38%.

Let that sink in for a minute. Currently 19.38% of all Florida “homeowners” are at least 90 days late on their mortgage. Do you think this is going to lead to higher home prices in the near future or lower? How will this effect mortgage backed paper? Also consider the fact that the $8000 handout from the government runs out at the end of this month.

Ok, so the housing market is not recovering at all. So this market rally must be based on a large turnaround in the jobs market. Folks out of work for a while must be finding jobs in droves. Lets take a look at how many people have been unemployed over 26 weeks.

Unemployed over 26 weeks:


Ok… that doesn’t look very good either.. maybe these folks are just some kind of losers and really the overall job market is improving?

Let’s take a look at all of the recessions since the 1940’s and this current recession and see how the overall job market is doing. With a 80% rally in the stock market it probably has turned quite a bit.



Oh… that doesn’t look too good either. Especially when you consider currently we are counting the 1.2-1.5 million temporary jobs for the US census in these numbers.
Well what about lending and consumer credit. A big part of this crisis according to the talking heads was “banks aren’t lending”. I assume consumer credit has turned around quite a bit then?



Oh… actually it has declined for 12 straight months now and has been declining throughout this whole market rally? Strange…..

So you have a situation where the real estate delinquencies are surging, the job market is not improving and banks are not lending yet the stock market is rallying like it is 1999. How can you explain this?

Easy, the government is spending and giving away more money than in any other time in history (and this is an understatement)

1.5 trillion dollars going to be spent just this year…
A record $220.9 billion deficit in February alone
For every dollar in taxes and other revenues the federal government took in, the government SPENT $3.05.
2.4 trillion needs to be auctioned off in the treasury market just this year.

From Chris Martenson:
"Taken together, this means that in only two short years, 2009 and 2010, as much new Treasury debt will be auctioned off to the public as was outstanding in 1995. Since government borrowing never gets paid down, at least in modern history, it means that the last two years have seen as much borrowing as happened over the period in which electricity was strung to every house, the highways were built, and our population tripled. What can we point to that was created over the last two years to rival those accomplishments? "

So we have paid for this stock market rally with our futures. And the sad part is we have not even improved the things that the average person on the street cares about like the price of their home, their job and if they have access to credit.... we just gave a bunch of money to banks who speculated in stocks and made another valuation bubble.

Do you feel this stock market rally was worth it?

More PPL

Pennsylvania Power & Light (PPL), sporting a 5% dividend, at its channel low of 28 and only 25% from its 5 year low versus nearly 100% away from its 52-week high.

Risk is low, reward is high. Near term price target -- $32.50 (top of the channel).

Long term price target -- $42

Buying 2 more lots