Friday, April 12, 2013

I've been bearish on BBY lately, but at the speed it is correcting this year's steep rally the stock could soon become a fetching buy once again. Check out the tout update if interested. The corrective pattern is so clear and compelling that this trade, if it materializes, promises to be a lay-up.

In combination with Goldman July 195 calls we hold, the dozen June 130 DIA puts acquired for (effectively)  1.50 were to have given us an effective straddle on the market. We shorted March 130 puts against them to reduce their cost basis but have held off on shorting the Aprils in sequence because they are not worth selling.  At this point it would take a very nasty swoon to roll into June 130-May 130 calendar spreads as we'd intended. Although the possibility of a market collapse cannot be ruled out, we should treat the existing position as a longshot bet on the unexpected -- and as insurance against it.  For now, though, please note that the Diamonds have precisely reached an important rally target aired here a while back. It seems unlikely to hold, but we'll have a better idea of the buying power remaining to be spent when we've seen how the target fares against this bullish onslaught. ______ UPDATE (May 2, 1:54 a..m. EDT):  With the market moving higher nearly every day, we had no chance to short April calls against our position, nor are we even remotely likely to get a shot at shorting some Mays. For that reason, I am booking an $1800 loss on the calls -- the largest on any trade I've advised in several years -- to put this tout out of mind.  If the stock market dives unexpectedly, we'll un-retire the tout if there's a play. For now, though, consider it a total loss.

We hold 32 July 195 calls with an average cost of 0.14. Our goal is to short July 200 calls against them for at least as much, but the strategy was conceived with expectations that bank stocks would lead the charge if the broad averages went bananas. Clearly that has not occurred, but there is still time for the financial sector to catch fire.  In the meantime, because we bought the calls with stingy bids, they are still worth what we paid for them. For now, do nothing further. We'll need a rally of at least $12 to achieve our goal -- a virtually riskless vertical spread that could produce of profit of as much as $16,000.  ______ UPDATE (May 2, 1:59 a.m. EDT): Goldman has looked like hell ever since we bought the calls, and it's clear that my expectation that the stock would lead the charge if the stock market went higher was dead wrong. Accordingly, I'm going to book a $448 loss and archive this tout. In the extremely unlikely event that the bank stocks catch fire between now and July, I'll re-publish the tout and we can proceed as originally planned.

The chart below comes from Doug Behnfield, a friend who is also the savviest and most successful financial advisor we know. Doug has been a bear’s bear for years, and to stay on the cutting edge, he talks almost daily with guys who turn up regularly on the network business channels and in interviews with major-league financial publications. He has produced stellar returns for his clients, mainly by keeping them well weighted in Treasuries. That strategy might seem like a no-brainer these days, especially with the long-term bonds in a vertical climb for the last month. But he has held this position through thick and thin, even at times when such savvy bettors as Pimco’s Bill Gross were throwing in the towel. No doubt, Doug likes to keep most closely in touch with economists and gurus who share his bearish point of view. It’s not a matter of misery loving company, either.  The stock market has indeed vexed bears by climbing a steep wall of worry.  And now, flouting the palpable threat of a downturn in corporate earnings, the Dow Industrials are making new all-time highs regularly.  More than ever, the question tormenting bears is: How could investors be so stupid?  For the permabear, there will always be comfort in talking to guys who can reel off a dozen good reasons why stocks are about to collapse. But that’s not why Doug talks to them.  Rather, he does so because he has the rare ability to reduce a hundred well informed opinions into a compact and logical set of facts that will consistently make his clients money. A Key Resistance So what do we make of his chart, which shows price action for the S&P 500 going back 20 years? Doug is laser-focused on just one detail: the intersection this