Friday Follies – Market Drifts Into the Weekend Slightly Weaker

Watch the Russell.

Both the Russell 2,000 and the NYSE (about 1,900) are broad-market indicators and both of those indexes have been weak, not just this week but for the month of November.  The Dow has just 30 stocks and any one (AAPL) can lift it higher and the S&P 500 has 500 stocks and heavyweight stocks (AAPL) can lift it higher without broad participation and the Nasdaq (100) is dominated by one stock (AAPL) and even the broader Nasdaq Composite (3,300) is very heavily weighted to it’s top stocks (AAPL).

Apple is up over 30% since early August and up 50% since the June swoon and 70 AAPL points time 8.5 Dow points per Dollar (yes, the index is that stupid) means AAPL alone added about 600 points (33%) of the Dow’s 1,800 point run since early August.  That’s a lot of eggs in one basket!

I would argue that AAPL may deserve its valuation but United Health (UNH) is up 55 points since October (467 for the Dow) so there’s two stocks responsible for more than half the gains right there.  How much did the rest of the index go up just because the leaders went up and NOT based on their own merits?  

As I mentioned on Wednesday, we are approaching the point of peak valuation on the broad indexes.  My prediction when we cashed out our last batch of portfolios on September 18th was that EVEN IF there were a trade deal with China, the S&P 500 would top out at 3,300 (10% gain) but, if there were no deal – we were just as likely to see 2,400 (20% drop) and, since we were sitting on some very large birds in the hand – it simply wasn’t worth chasing others in the bush until we saw how 2019 played out.

That didn’t last too long, by October 1st we were already bored and we started making short-term picks and then we decided they were good enough to build a new portfolio around, so we started a new Short-Term Portfolio and then, for balance, we started two more in October.  My intent was to wait out the year but it’s kind of boring just watching the markets and our Members do love portfolios – so here we are again but using just $300,000 (10%) virtual Dollars out of the over $3M we cashed out in September.

Already, our Short-Term Portfolio is up 52.1% and we have bets in both directions there so I’m not all that worried but I am concerned about the Dividend Portfolio and the Earnings Portfolio – so we’ll be reviewing them today to make sure we feel good about leaving them exposed to the market insanity over the holdiay weekend (Thanksgiving is Thursday in the US but by Wednesday the market will be dead and subject to rough swings through Tuesday, Dec 3rd.  Our STP postitions are as follows:

These are mostly the same positions we had when we updated the STP on November 4th, when the portfolio was “just” up 21.7% at $121,735 so it’s not even Thanksgiving and we’re up another $30,318 for the month – who needs large portfolios when we can generate these kinds of returns from the small ones?  We bought back the short BKNG calls and sold the CBS puts and sold more TSLA long (hell, you can see by the dates what we changed) and the MO play is new but the rest of the gains camr from simply doing well on those same positions.  

In trading, as in many things, it’s quality, not quantity that matters.  On August 29th, as we were preparing to go to CASH!!! for Q4, I selected just “5 Trade Ideas for the Next 5 Months” as a nice substitute for the $100,000 Portfolios we were cashing out:

• Sell 5 VAC April $85 puts for $5.70 ($2,850)
• Buy 7 VAC Jan $80 calls for $20 ($14,000)
• Sell 7 VAC Jan $90 calls for $12.80 ($8,960)

The net cost of the spread is $2,190 and, if successful, it pays $7,000 at $90 or higher for a gain of $4,810 (219%) in 5 months, though the short puts won’t expire until April – it should get us very close to our goal by January. The ordinary margin requirement of the short puts is $5,280 so a pretty efficient way to make $4,810 in 5 months!

We’re looking good for our $90 goal and the full $4,810 gain.  

• Sell 10 WBA Jan $50 puts for $3.70 ($3,700)
• Buy 30 WBA Jan $47.50 calls for $5 ($15,000)
• Sell 30 WBA Jan $50 calls for $3.60 ($10,800)

The net cost of the spread is $500 in cash and the ordinary margin requirement for the short puts is $8,918 and, if WBA is over $50 on Jan 17th, the short puts expire worthless and the spread would be $7,500 in the money for a $7,000 (1,400%) gain in 5 months.

Well over our target so we expect the full $7,000 gain here.  

• Sell 10 LB Jan $17.50 puts for $2.80 ($2,800)
• Buy 25 LB Jan $15 calls for $3 ($7,500)
• Sell 25 LB Jan $17.50 calls for $1.85 ($4,625)

That’s net $75 on the $6,250 spread so there’s $6,175 (8,233%) upside potential if LB can get back over $20 by Jan 17th (option expiration day) and it’s an efficient trade as the ordinary margin requirement is just $3,834 so a very good way to make $5,150 into the holidays!

This one might come down to the wire but I think we’ll make the full $6,175 on this one. 

• Sell 10 THC Jan $20 puts for $2.50 ($2,500)
• Buy 20 THC Jan $15 calls for $6.50 ($13,000)
• Sell 20 THC Jan $20 calls for $3.10 ($7,500)

That’s net $3,000 on the $10,000 spread so $7,000 (233%) upside potential is not as exciting as our other trade ideas but THC is a lot more of a blue chip so possibly the least risky of the set. Margin is also light, just $2,886 according to TOS in an ordinary margin account.

No worries here, we blew through our target so looking forward to $7,000 on this one.

• Buy 50 SKT Jan $12.50 calls for $1.85 ($9,250)
• Sell 50 SKT Jan $14 calls for 0.95 ($4,750)
• Sell 20 SKT Jan $15 puts for $1.85 ($3,700)

That’s net $800 on the $7,500 spread so $6,700 (837%) of upside potential if SKT is over $15 on Jan 17th. Since we’re selling puts over the current price, the ordinary margin is $5,741, so more than we’d like but, as noted on Aug 1st, I think SKT is ridiculously under-priced.

My new table-banging stock – so ridiculously undervalued.  Also a little iffy but $15 should hold and a lovely $6,700 to collect here.

So that’s a fairly quick $33,603 to be made on our original $6,565 in cash and $26,659 in margin required for these 5 trades works out to a 511% return on cash in 5 months.  More importantly, we took our huge gains off the table but still made a very respectable 33.6% return on the re-commited $100,000 while the S&P gained just 3% so we’re outperforming the index by 10x – without all that silly risk.

THAT is how you play an uncertain market – even if you are bored! 

Have a great weekend, 

– Phil

Provided courtesy of Phil’s Stock World.